July 31 (Bloomberg) -- IndyMac Bancorp Inc., the second- largest independent U.S. mortgage lender, said profit declined as more borrowers fell behind on payments and it made less from selling loans to investors.

Second-quarter net income slid 57 percent to $44.6 million, or 60 cents a share, from $104.7 million, or $1.49, a year earlier, the Pasadena, California-based company said today in a statement. Revenue fell 21 percent to $297.8 million.

Chief Executive Officer Michael Perry has said loans made by IndyMac, which caters to so-called Alt-A borrowers who fall just short of standards for top-rated loans, are 17 times less prone to default than subprime mortgages. Shares of the company had dropped 52 percent this year before today on concern rising defaults on loans made to the riskiest borrowers would spread to the types in which IndyMac specializes.

``Those of us at IndyMac get a little sick of hearing Alt-A is near subprime,'' Perry said on a conference call with analysts. The mortgage industry's losses from Alt-A loans are about 1/12th the rate on subprime loans, he said.

Shares of IndyMac rose 31 cents to $22 at 4 p.m. in New York Stock Exchange composite trading. They've lost 51 percent this year, more than the 34 percent drop for Countrywide Financial Corp., the biggest U.S. mortgage lender.

IndyMac was expected to earn 52 cents a share, the average estimate of nine analysts surveyed by Bloomberg. The company said it had a ``one-time expense reduction of $10.3 million related to the curtailment of our pension plan.''

Non-Performing Assets

Loans and other assets that have stopped paying interest more than quadrupled to $516 million from a year earlier, IndyMac said. The company was forced to repurchase $219 million of loans from investors because borrowers missed payments, up from $48 million a year earlier.

``We expect credit to deteriorate further as '07 progresses due to falling house prices and loan resets,'' Standard & Poor's analyst Stuart Plesser wrote today in a note. Plesser cut his per-share earnings estimate for this year by 46 cents, to $2.50.

Perry said in an interview that the mortgage industry slowdown is ``more of a credit cycle issue'' than one tied to housing sales.

``The housing boom lasted so long that consumers, rating agencies and investors all got too aggressive'' in taking on too much risk, Perry said. ``So at the end of the cycle we all did some stupid things, but once you pay for the cost of those stupid things there's still a fundamentally sound business left.''

Earnings Forecast

While the company refrained from its usual practice of providing a numeric outlook for earnings, Perry said credit losses from loans it plans to sell will probably come down ``substantially'' in the second half of the year. Earnings ``should move up pretty rapidly'' once credit costs begin to stabilize, he said.

American Home Mortgage Investment Corp. said today it may have to liquidate because ``very significant margin calls'' from its creditors made it unable to fund new loans. Countrywide said last week overdue payments had spread to some of its most creditworthy customers.

IndyMac last week said it cut 400 jobs, or about 4 percent of its workforce, because mortgage demand was waning. The company will record a $6.5 million charge in the third quarter for severance and other costs, it said.

Interest Income

The company's net interest income advanced to $149 million from $130 million. It made about $22.5 billion in new loans in the quarter, up 12 percent, even as it cut back on lending to riskier customers.

IndyMac earned $101 million in the quarter from loan sales to investors, half the $202 million it realized a year earlier. The company's provision for loan losses increased to $17.2 million from $2.2 million.

The lender isn't buying back its shares ``right now,'' Perry said on a conference call with analysts. It's ``focused on safety and soundness'' and paying its dividend ``through this credit cycle,'' he said.

The dividend currently equates to about 90 percent of its earnings per share, a level that ``isn't sustainable forever,'' Perry said. In the interview, he said a payout ratio of about 35 percent to 50 percent would be considered normal.

Alternative Loans

IndyMac was the largest ``Alt-A'' home lender in the U.S. last year, according to data from trade publication Inside Mortgage Finance. The loans are an alternative for A-rated borrowers who can't satisfy all the terms for a regular ``prime'' mortgage. Subprime loans go to people with the worst credit records, and they're defaulting at the highest rate since 2002, according to the Mortgage Bankers Association.

The share of all U.S. mortgages entering foreclosure rose to a record in the first quarter, the Mortgage Bankers Association said in June. Alt-A loans haven't been immune, with rivals including Capital One Financial Corp. and American Home Mortgage reporting more overdue loans this year.

Defaults on some Alt-A mortgages packaged into bonds last year have begun to outpace subprime loans, Citigroup Inc. analysts reported this month. The three-month constant default rate for 2006 Alt-A hybrid adjustable-rate mortgages is 2.3 percent, compared with 2.2 percent for subprime ARMs, analysts led by Rahul Parulekar wrote in a July 20 report.

To contact the reporter on this story: Will Edwards in Charlotte, North Carolina, at wiedwards@bloomberg.net.

Last Updated: July 31, 2007 16:10 EDT