This is what Indymac says in its 8K dated March 15 (and it did not convince the market the other day):
Based on the definition of subprime established by the Office of Thrift Supervision (OTS) for our regulatory filings, only 3.0 percent of Indymac’s $90 billion in mortgage loan production in 2006 was subprime.
"The average FICO score on Indymac’s 2006 loan production was 701..."
"Alt-A loans are generally for prime credit quality borrowers who do not meet the published underwriting requirements of the GSEs, primarily because they choose not to fully document their income but instead elect to qualify for the loan based on their strong credit history, liquid cash reserves and home equity level."
As of December 31, 2006 (the most current industry data available), the 30+day delinquency percentage for Alt-A loans in the mortgage industry was 5.0 percent as compared to 22.7 percent for subprime loans.2 There is no current industry data available for agency conforming loans as the GSE’s have yet to file financial statements for 2006, which would include that data.
Indymac’s 30+day delinquency rate on its total $123 billion portfolio of Alt-A loans (which includes the $110 billion portfolio of Alt-A loans cited above plus $13 billion of loans held for sale and for investment on our balance sheet) was 5.40 percent as of December 31, 2006. 3 Of our $156 billion portfolio, we own the credit risk on $16 billion in our portfolios of loans held for sale (HFS) and held for investment (HFI). Loans in the HFS portfolio stay on our books for an average of 47 days (actual average for Q4-06). The loans in the HFI portfolio have an average loan size of $309,924, average FICO score of 716 and an average original loan-to-value ratio (LTV) of 73 percent.
We are forecasting that our NPAs could rise from 0.63 percent at year-end to 1.50 percent to 2.0 percent during 2007.
-> NDE uses a stated leverage of 14x. The impact of the NPA level would be between 12.5% and 20% of the shareholders equity alone, or between 80% and 135% of earnings estimated for 2007.
Noteworthy:
To improve our credit performance and earnings in the future, we tightened our underwriting guidelines throughout 2006 and substantially accelerated this tightening in 2007 for the two loan categories — 80/20 “piggybacks” and subprime...
Applying these guideline cutbacks ...we would have eliminated approximately 51 percent of our 80/20 piggyback and subprime production, reduced our overall production by 15.9 percent ...
-> this means that 30% of the massive Q4 production is "piggyback/subprime".
What does Indymac say about 1998?
Indymac’s thrift structure and capital and liquidity resources are a source of strength.
There are some parallels between what is happening in the subprime mortgage market today and the impact the global liquidity crisis of 1998 had on capital markets funded (non-depository) mortgage companies, particularly mortgage REITs. As was the case then, the most severe problems are being encountered by mortgage REITs. In 1998, Indymac was a mortgage REIT, a structure the current management team inherited in 1993 from our founders. When the liquidity crisis hit, we were forced to shrink our balance sheet dramatically in the 4th quarter of 1998 to raise liquidity, and this caused us to suffer our first and only quarterly loss, although we did record a profit for the full year of 1998.
After that experience, Indymac decided to shed its mortgage REIT structure, so that we would never again subject ourselves to this kind of liquidity risk. We gave up our REIT status at the end of 1999, and on July 1, 2000, Indymac became a federally chartered thrift. The thrift structure has enabled us to diversify our funding sources and substantially improve our overall liquidity position as shown in the table below:
<table>
-> There is only one difference between the indymac 1998 and the indymac, version 2007:
In 1998, it showed 13% equity, thus a leverage of under 8.
Now its core capital is shown at 7.39% (equity to assets: 7%); so it nearly doubled the leverage since 1998.
Conclusions (by NDE):
“Clearly, the mortgage market and, in particular, the secondary market for mortgages are in a state of irrational panic right now, making it virtually impossible to predict short-term loan production and sales volumes or earnings with any reasonable precision until things settle down,” commented Michael W. Perry, Chairman and CEO of Indymac. “With that said, at this point our view that in the first half of 2007 Indymac would earn around a 10 percent ROE and in the second half ... as our credit tightening and pricing changes take affect and hopefully the markets settle down ... could earn around a 15 percent ROE still looks, roughly speaking, right.
-> a 10% to 15% ROE is a far cry to the 20+ % it was to able to show recently. It is essentially an thinly veiled earnings warning. A 10% ROE means less than 0.75% of earnings on assets.
Its analyst estimate is now at 3.68, or 13.2% ROE, down from originally 5.49 (a 20.1% ROE).
That 0.75% net margin being sufficient for positive earnings after NPA, writedowns and repurchases is rank speculation given the earnings volatility and trends of 2007 not factored into estimates. |
