By KATE BERRY
Michael Perry sounds like a man swimming against an advancing tide on Wall Street.
The housing boom is winding down amid rising interest rates, the thinking goes, and with it goes the mortgage industry.
But Perry, chief executive of Pasadena-based thrift IndyMac Bancorp Inc., whose mortgage division is based in Irvine, said he believes Wall Street is too concerned about interest rates and the ability of homeowners to repay risky mortgages.
“The one thing I have a lot of confidence in is the American consumer being able to be smart enough to make their own financial decisions,” Perry said.
Wall Street isn’t so sure.
Shares of IndyMac, which counted a market value of $2.5 billion last week, are off nearly 20% since August. Other lenders, including Washington Mutual Inc. and Countrywide Financial Corp., have seen their shares drop in recent weeks.
IndyMac was one of the first lenders to allow homebuyers to get a mortgage via the Internet. Now the company’s Irvine unit plans to open as many as 80 branches in the next four years in an attempt to grow deposits,a cheap source of money that could then be put to use funding loans.
Earlier this year, IndyMac leased 123,000 square feet of office space in the Irvine Spectrum. The company plans to move next year and grow from about 400 local workers to 700 in the next year or so.
IndyMac’s expansion comes just as the housing boom appears to be peaking. Last month, mortgage stocks received a drubbing after several years of record stock performance.
Bank of America Securities analyst Robert Lacoursiere sparked a selloff last month when he downgraded Calabasas-based Countrywide Financial to “sell” from “neutral,” and IndyMac and Oakland-based Golden West Financial Corp., parent of World Savings Bank, to “neutral” from “buy.”
“We think market sentiment for mortgage sector stocks will be increasingly characterized by fear and loathing,” Lacoursiere wrote in a research note, citing “rising anxiety and difficulty gauging the scope and impact of prospective origination declines.”
Perry, who joined IndyMac in 1993 when it had just four workers, is credited with creating a “hybrid model”,combining a mortgage bank with a wholesale arm that buys and sells loans.
The strategy helped catapult IndyMac to be the 12th-largest U.S. thrift with $19.4 billion in assets at recent check.
“They’re definitely a different sort of animal,” said Manuel Ramirez, a banking analyst at Keefe Bruyette & Woods Inc. “They are actually fortunate because there haven’t been many pure-play mortgage companies that have become regulated thrifts.”
Ramirez and other analysts question IndyMac’s plan to open branches in Southern California as mortgage originations are slowing.
“We’re not talking about a radical model here, but doing something that a lot of lenders have been doing, but in a distinct way,” said Richard Wohl, IndyMac’s president who helped build the thrift’s network of mortgage brokers.
IndyMac began life as a real estate investment trust but ran into trouble in 1998 when the company ran out of funding. That year, it lost $73.7 million.
Under the threat of collapse, Perry made the unusual decision of changing IndyMac’s corporate structure by buying a federally regulated thrift. The deal allowed IndyMac to tap the deposits at its 10 newly acquired branches and get a line of credit from the Federal Home Loan Bank to continue making home loans.
Since then, IndyMac has led the boom in mortgage originations over the Internet by creating an electronic system that allows potential homebuyers to fill out a Web-based form with 55 questions. The application can be analyzed within minutes for quick approvals.
IndyMac saw second-quarter income jump 52% from a year earlier to $83.1 million. Loan production hit $14.2 billion in the quarter, up from $9.7 billion a year earlier.
A few analysts have expressed concerns about the high percentage of option adjustable rate mortgages issued to California homebuyers, especially with indications that the Federal Reserve will continue to hike short-term interest rates.
As much as 37% of IndyMac’s home loan production,$900 million on its balance sheet,comes from option ARMs in which borrowers have the option to pay interest only, or pay interest and principal, or make a minimum payment.
If they choose the minimum, they defer not only principal payments but also interest payments. This results in negative amortization,adding to a homeowner’s total mortgage debt instead of reducing it each month.
Expecting Fixed Switch
IndyMac executives and some Wall Street analysts don’t see the ARM loans as a big problem, figuring that consumers will switch to fixed rates as interest rates rise.
“While many on the Street continue to fret about option ARMs and negative amortization, we remain very positive on the product’s interest rate and credit characteristics,” Paul Miller, an analyst at Friedman Billings Ramsey & Co., wrote in a recent report.
Wohl, IndyMac’s president, argues that credit cards have been charging negative amortization to borrowers for decades with very little fallout or criticism. Homeowners have an asset that is likely to appreciate and the interest on it is tax deductible, he said.
Perry has set an ambitious goal of growing the company to become one of the top eight U.S. mortgage lenders by 2008. He said the trend in which consumers are using their homes as a financial asset will help fuel that growth.
Berry is a staff writer with the Los Angeles Business Journal.
