Nov. 6 (Bloomberg) -- IndyMac Bancorp Inc., the second- largest independent U.S. mortgage lender, reported a loss five times bigger than the company forecast in September as foreclosures and late payments rose to a record.

IndyMac cut its dividend in half, eliminated more than 1,500 jobs and increased reserves for bad loans by 47 percent to help weather the worst housing slump in 16 years. The loss of $202.7 million, or $2.77 a share, compares with the 50-cents-a-share forecast the Pasadena, California-based company made on Sept. 7.

IndyMac had its first loss in more than eight years as U.S. home foreclosures doubled in the quarter. Borrowers with the worst credit histories are failing to keep up with higher payments on adjustable-rate mortgages, according to RealtyTrac Inc., which has a database of more than 1 million properties in 2,500 counties.

``We are in the midst of the most severe downturn our industry has experienced in modern times,'' Chief Executive Officer Michael Perry said in a statement. ``While this loss is substantially higher than we had been forecasting, it was clearly not unexpected given the magnitude of the losses being reported by others in our industry.''

Perry said IndyMac will reduce the dividend further, after cutting it to 25 cents, if the company is unprofitable in the fourth quarter. The third-quarter loss compares with a gain of $86.2 million, or $1.19 a share, a year earlier. The number of loans in which borrowers are not paying interest grew nearly fivefold to 2.5 percent of total assets.

Shares Decline

IndyMac fell 28 cents, or 2.2 percent, to $12.49 at 4 p.m. in New York Stock Exchange composite trading. The stock's 72 percent decline this year compares with a 54 percent drop for Bloomberg's index of 31 mortgage real estate trusts and a 65 percent slide for Countrywide Financial Corp., the biggest U.S. mortgage company.

Countrywide, based in Calabasas, California, reported a $1.2 billion loss on Oct. 26 that was its first in 25 years.

Shares of IndyMac rose as much as 15 percent earlier today after Perry said the company has adequate capital and reserves to survive the mortgage industry's collapse.

The ``market expects a bigger erosion in our book value than we believe is realistic at this time,'' Perry said, adding that his ``key'' focus is retaining book value, or assets minus liabilities. The company's book value was $24.31 per share as of Sept. 30.

Citigroup, Merrill

Citigroup Inc., the biggest U.S. bank, said this week that additional losses on mortgages and related securities will be as high as $11 billion, and Merrill Lynch & Co., the largest U.S. brokerage, took an $8.4 billion writedown last month linked to the home-loan market. Both companies are based in New York.

IndyMac was the largest ``Alt-A'' home lender in the U.S. in 2006, according to data from trade publication Inside Mortgage Finance. The loans are an alternative for A-rated borrowers who fall short of standards for regular prime mortgages. The risk of default is lower than for subprime loans, which are made to people with the worst credit records.

Most of IndyMac's credit problems stem from loans to home builders, home-equity lines of credit and subprime loans to the riskiest borrowers, Perry said. The company has stopped virtually all of that lending, he said.

Home Loan Banks

IndyMac's ability as a thrift to borrow from the Federal Home Loan Bank Board and shift nonperforming loans from ``held for sale'' to ``held for investment'' gives it more options than pure mortgage lenders, said David Lykken, a mortgage industry consultant at MBSD LLC in Austin, Texas.

Alt-A loans made between 2005 and 2007 are likely to produce some of the industry's highest losses in percentage terms, IndyMac said in a regulatory filing today.

The company increased its reserve for future credit losses to $1.4 billion, from $947 million on June 30.

``The bigger problem they face is the credit situation, as we've heard over and over from Citigroup and others,'' said Gary Gordon, an analyst at Portales Partners in New York who rates IndyMac ``hold.'' ``Losses are starting to mount and they are having to take bigger reserves, and it looks like this will only get bigger.''

Because demand from investors for Alt-A mortgages has collapsed, IndyMac now makes loans that can be resold to government-sponsored enterprises including Freddie Mac and Fannie Mae.

Unexpected Severity

``In hindsight we could have pulled back sooner,'' Perry said. ``But scale is critical for success. We were following major financial institutions and like most thought the downturn would not be this severe.''

IndyMac last reported a loss in the fourth quarter of 1998, after Russia defaulted on government bonds and helped spark a global liquidity crisis.

The company said it is considering selling part of its reverse mortgage business, which Perry valued at $300 million to $500 million. IndyMac bought Financial Freedom in 2004 for $125 million and has since recouped $135 million in profits from the business, which typically enables older borrowers to convert home equity into a stream of payments.

To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina, at 6589 or dmildenberg@bloomberg.net.

Last Updated: November 6, 2007 16:33 EST