Aug. 2 (Bloomberg) -- IndyMac Bancorp Inc. is joining rival lenders in making ``very major changes'' to home-loan standards and charging higher rates because of a slump in mortgage securities, the company's chief executive officer said.

The market for mortgage bonds has become ``very panicked and illiquid,'' CEO Michael Perry wrote in e-mail to employees yesterday. National City Corp. this week stopped buying second mortgages from other lenders and making some stated-income loans. Wachovia Corp., the fourth-biggest U.S. bank, today decided to stop making Alt A mortgages through brokers.

``Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so, our industry and IndyMac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself,'' Perry wrote.

The credit tightening by Pasadena, California-based IndyMac, the ninth largest U.S. mortgage lender, and competitors on loans considered less risky than so-called subprime, comes when it's ``difficult'' to trade even AAA-rated mortgage bonds that aren't guaranteed by government-chartered Fannie Mae and Freddie Mac, or federal agency Ginnie Mae, Perry wrote.

``The market conditions in both the secondary mortgage market as well as the national real estate market'' will force Melville, New York-based American Home Mortgage Investment Corp., the 13th largest lender, to shut down tomorrow, CEO Michael Strauss told staff in an e-mailed memo today.

Exiting Alt A

Atlanta-based SunTrust Banks Inc., the 14th largest home lender, has ``pretty much gotten out of Alt A'' for now, said Sterling Edmunds, who heads its mortgage unit.

``Over the past week there's been no liquidity in the non- conforming mortgage market,'' Edmunds said. He said he has less ability than ever before in his career to sell loans to companies other than Washington-based Fannie Mae or McLean, Virginia-based Freddie Mac, or in securities guaranteed by them. That includes so-called prime jumbo loans, or ones with little risk that are larger than the companies can buy, he said.

Non-guaranteed bonds linked with subprime loans, to borrowers with poor credit, have caused losses among hedge funds, insurers and banks from the U.K. and France to Taiwan and Australia. Standard & Poor's last month downgraded AAA second- mortgage bonds sold last year by New York-based Goldman Sachs Group Inc. to BBB.

Moody's Investors Service yesterday changed its assumptions on how well Alt A loans, a credit class above subprime, would perform, making securitizations less profitable.

Changing Guidelines

Other ``major'' mortgage lenders are also changing guidelines this week, Perry wrote. Some are ``leaving subprime, Alt-A, and other products altogether or restricting some products to only their own retail channel,'' he wrote.

Perry's memo, which was addressed to the staff of IndyMac's bank and was also sent to the board of directors, was today posted on a company-sponsored blog. Spokesman Grove Nichols declined to detail what changes the lender is making.

National City, based in Cleveland, was the 16th-largest home lender last year, according to newsletter Inside Mortgage Finance. The bank won't make loans that can't be resold to Fannie Mae or Freddie Mac, the two largest mortgage buyers, unless the borrowers' incomes are fully documented, spokeswoman Kristen Baird Adams said today.

Charlotte, North Carolina-based Wachovia, the seventh largest home lender, discontinued making Alt A mortgages through brokers because ``it's becoming more difficult to sell these mortgages in the secondary market as the financial markets continue to tighten,'' spokeswoman Christy Phillips-Brown said. The bank will ``monitor the market and re-introduce products as conditions become more favorable,'' she said.

SunTrust

Alt A, short for Alternative A, mortgages fall just short of the typical standards of Fannie Mae and Freddie Mac and the banks that use them to judge which borrowers deserve the lowest rate. They're usually granted to borrowers with good credit records who seek atypical loan terms or underwriting, such as reduced proof of their income. Such flexibility is given on prime loans if consumers have enough offsetting positive attributes, such as cash in the bank.

Lenders also are dropping so-called piggyback mortgages, said David Stevens, head of a home-lending venture for Fairfax, Virginia-based realty firm Long & Foster Cos.

``There's just no market'' for the loans, second mortgages used in lieu of down payments or mortgage insurance, he said today. ``Nobody's taking them. They're radioactive.''

About 40 percent of new mortgage debt used to buy homes last year involved piggyback loans, more than double the level in 2001, according to SMR Research Corp., a Hackettstown, New Jersey-based research firm.

Tightening Criteria

So-called ABX indexes, which track the cost of protection against defaults on subprime-mortgage bonds, tumbled to new lows today. The move suggests that investors believe that tightening lending standards will make it harder for borrowers who've improved their credit scores to refinance into new loans.

Perry wrote that U.S. Senator Christopher Dodd called him yesterday morning ``seeking an understanding of `what is really going on and how can I and Congress help?''' Dodd, a Connecticut Democrat, is chairman of the Senate Banking Committee.

Shares of IndyMac rose 89 cents, or 4.4 percent, to $21.05 at 4:01 p.m. in New York Stock Exchange composite trading. Shares of American Home fell 3 cents, or 2 percent, to $1.45.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net

Last Updated: August 2, 2007 18:47 EDT