Mortgage Daily

Published On: March 2, 2007
IndyMac Impresario Offers Outlook

CEO letter to shareholders

March 2, 2007


photo of Coco Salazar
IndyMac Bancorp Inc. expects the current volatility in mortgage lending to hurt its earnings and is taking steps, including a salary and hiring freeze, to improve its performance. But the company’s CEO has no regrets about how it has operated and sees a better mortgage market emerging from the current chaos.

In a letter to shareholders, IndyMac’s chief executive officer, Michael Perry, expressed he was disappointed with how 2006 ended and with the outlook for 2007, as he expects earnings per share will likely be lower than last year “given the tough conditions in the mortgage market.”

This, despite that IndyMac broke several records in 2006, including in earning per share of $4.82 — a 9 percent gain, in mortgage loan production of $90 billion — a 48 percent jump over the previous year, in mortgage market share of 3.58 percent and in net revenues. Return on equity of 19 percent was strong but off slightly from the prior year’s level of 21 percent, he noted.

However, the thrift’s reported overall fourth quarter net income of $72 million sunk from the linked quarter’s $86 million.

Perry noted the thrift segment saw a fairly dramatic decrease in the ROEs it was earning in the fourth quarter, mostly caused by net interest margin erosion in its whole loan and mortgage-backed securities portfolios.

“Of greatest concern to me is that I see this as part of a broader trend, the continuation of which is inevitable,” he added.

As a result, IndyMac said it does not make economic sense to continue growing those portfolios to the extent that it had previously planned. In the future, capital deployment and profit growth will be more focused on the two broad segments of the mortgage banking business: production and servicing. The changes represent “fine-tuning more than a major strategic shift,” it noted.

Among the steps IndyMac is taking to improve performance for shareholders in the short term is adjusting mortgage underwriting guidelines. While doing so, it plans to continue to profitably grow mortgage production and gain market share “by taking advantage of the difficulties experienced by our competitors and aggressively growing our sales force with top producers.” It also intends to further penetrate existing wholesale and correspondent customers, both with increased volume of products they currently deliver and through new volume of products not currently delivered, such as reverse mortgages and certain specialty products, the letter stated.

IndyMac said it will control costs through the current hiring freeze of non-revenue-generating personnel and salary base freeze company-wide. With the freezes, along with the normal attrition rate of roughly 20 percent per year, IndyMac should avoid mass layoffs and could produce up to $60 million in pre-tax cost savings annually, Perry said.

Perry highlighted, however, that mortgage and housing industries are cyclical and can produce volatile results, but the mortgage market “is huge, and long-term, mortgage lending is a great business with U.S. mortgage debt outstanding growing by eight to 10 percent per year.” He further noted that in the 14 years through 2006, since current management has been in place, IndyMac has delivered to shareholders a 23 percent compounded annual rate of return.

“We can accept some short-term earnings volatility with long-term performance like what we have achieved, and in this respect I like to quote Warren Buffet when he says, ‘Charlie (Munger) and I would much rather earn a lumpy 15 percent over time than a smooth 12 percent,'” Perry wrote.

Due to the current trough period in this mortgage and housing cycle, IndyMac said it expects ROE to continue lowering this year to 10 percent to 15 percent. When these two markets stabilize, it perceives ROE will improve back up to last year’s level of between 15 percent to 20 percent, and during boom times expects ROEs could exceed 20 percent.

“My view is that weaker management teams can often outperform stronger teams in terms of short-term earnings during boom times precisely because they are undisciplined, cut corners and loosen controls in order to drive revenue in the door,” Perry said. “Over the long term, these same firms can suffer losses and reversals, causing many of them to close their doors, unfortunately tainting the entire mortgage industry.”

While IndyMac also loosened its lending standards and suffered increased credit losses in the fourth quarter even after it began tightening them, the losses in “no way” threaten the viability of the company, Perry noted. He added he would not do anything materially different if he had to do it all again because the company significantly enhanced for the long-term by the market share gained and because, otherwise, the company would have lost short-term profits, as well as customers and sales force to competitors, “which would, in my view, have impaired IndyMac more than the credit losses we will suffer over the next few years.”

“The difficult market environment we are facing — though unpleasant now, particularly in its negative impact on our stock price — will have longer term benefits as it separates the weak from the strong, [and] weeds out some of the more reckless competitors,” the CEO said. “I am confident that we will emerge from this environment in a stronger competitive position than ever before.”

back to current headlines

Tools for Your Next Big Decision.

Amortization Calculator

Affordability Calculator

Mortgage Calculator

Refinance Calculator

FHA Mortgage Calculator

VA Mortgage Calculator

Real Estate Calculator


Pre-Approval Resources!

Making well educated decions in a matter of minutes and stay up to date on the latest news Mortgage Daily has to offer. Read our latest articles to stay up to date on what’s going on…

Resource Center

Since 1998, Mortgage Daily has helped millions of people such as yourself navigate the complicated hurdles of the mortgage industry. See our popular topics below, search our website. With over 300,000 articles, we are guaranteed to have something for you.

Your mortgages approval starts here.

Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here. Add 1-2 sentence here.

Stay Up To Date with Today’s Latest Rates


Today’s rates starting at


5/1 ARM
$200,000 LOAN

Home Refinance

Today’s rates starting at


$200,000 LOAN

Home Equity

Today’s rates starting at


$200,000 LOAN


Today’s rates starting at


$200,000 LOAN