The mortgage lender, which provides "Alt-A" loans, suffers as the mortgage crisis spreads
For investors in IndyMac Bancorp (IMB), here's the good news: the mortgage lender handles hardly any subprime loans. Defaults on the risky mortgages have skyrocketed, killing off a few of IndyMac's rivals. And Bear Stearns reported that its two hedge funds that held subprime mortgage debt were virtually worthless.
The bad news for IndyMac: The subprime crisis is spreading to other kinds of debt.
On Wednesday, IndyMac's stock fell 5.5% to $27.45. A downgrade by a Lehman Brothers analyst exacerbated worries that have sent the stock falling almost 40% so far this year.
At the top of the list of worries is so-called "Alt-A" mortgages. Subprime loans are taken out by buyers with low credit scores. Buyers who take out Alt-A loans are supposedly less risky, but they submit little documentation to prove it. The loan approval is usually based on a credit score and little else, with no proof of income. There's a "big spectrum" of quality among the loans, says Standard & Poor's Equity analyst Stuart Plesser. (S&P, like BusinessWeek, is owned by McGraw-Hill.)
IndyMac, as one of the country's biggest Alt-A originators, is vulnerable as the defaults rise among these loans. "From a credit quality perspective, it's a notch above subprime," says Keefe, Bruyette & Woods analyst Manuel Ramirez (KBW does investment banking with IndyMac). However, "you've seen signs of pretty significant credit deterioration," he says. Delinquencies and defaults are up.
Mortgages are often re-packaged by lenders like IndyMac and sold on secondary markets. There are signs that debt investors are shying away from these risky credit products, sending prices down. That makes it harder for IndyMac to unload its riskier loans.
Lehman Brothers analyst Bruce Harting cited Alt-A problems in his downgrade of IndyMac from overweight to equal weight.
Part of the problem is that no one really knows how bad the loan crisis will get, Plesser says. Experts worry that defaults will increase. "How many people were given mortgages who couldn't afford the loan?" Ramirez asks.
As important for IndyMac, what's the value of the homes that serve as collateral for its loans? "Now that you have home prices going down, what they have backing [the loans] isn't as strong as it once was," Plesser says.
Despite the worries, IndyMac is in a better position than many rivals. "They're not going to evaporate in the course of a week or a month," Ramirez says. That's because IndyMac, as a thrift, also has access to a large number of bank deposits. That liquidity can help the firm survive rough times, and is "a huge plus in this environment, which is getting a lot choppier," Ramirez says.
And, in addition to Alt-A loans, IndyMac sells many other products. It's been a pioneer in reverse mortgages, though it's now facing more competition on that increasingly popular product.
Also, the disappearance of rivals has helped IndyMac gain market share, Plesser and Ramirez say. "If they survive, they'll be in an extremely strong position," Plesser says.
It's also worth noting that not just the number of competitors, but also the market as a whole, is shrinking. The housing slump means fewer people are applying for mortgages.
Investors should get a better idea of the problems at IndyMac when the company reports its second quarter earnings on July 31.