Blind optimism at IndyMac?
Commentary: Analyst believes risk remains at second-largest lender
By Herb Greenberg, MarketWatch
Last Update: 8:49 PM ET Aug 19, 2007
SAN DIEGO (MarketWatch) -- Like many successful executives who have built a company virtually from scratch, Michael Perry is a natural optimist.
As the mortgage industry has been pelted, he has consistently said he believes his company, IndyMac Bancorp Inc. (IMB)
, won't just be a survivor, but eventually will thrive. This past week, writing on his company's blog on the same day that rival Thornburg Mortgage Inc. issued a four-day moratorium on locking in new loans, Perry went so far as to say that the "only issue" IndyMac faced was "how much business we temporarily have to cut out, because there is no private mortgage secondary market right now." See blog theimbreport.com
IndyMac, he has argued for months, has been unfairly lumped in with the subprime mess even though subprime loans (those extended to borrowers with spotty credit) make up only small part of its overall portfolio. Instead, most of IndyMac's business is in the so-called Alt-A space, which is generally described as being somewhere between subprime and prime not that Perry agrees with that description.
"That's true," he was quoted as saying in a company news release in March, "but not very accurate given the facts. Let me give you a simple, visual geographic analogy. That's like saying that our headquarters in Pasadena is 'in between' Los Angeles and Las Vegas. True enough, but there's the question of degree: Pasadena is 11 miles northeast of Los Angeles and Las Vegas is 262 miles northeast of Pasadena."
Geography lesson aside, it is clear that Perry is doing his best to distance himself from anything related to subprime, which is understandable. However, as investors in all mortgage companies are painfully aware, subprime is the least of anybody's worries. The greater concern, as the days go by, is how the rapidly expanding mortgage crisis will affect a company like IndyMac, which in addition to being second only to Countrywide Financial in size among independent mortgage lenders, operates the country's seventh-largest savings and loan.
"Based on an objective analysis of the facts," Perry said in the same statement that contained the geography lesson, "talk of the 'subprime contagion' spreading to the Alt-A sector of the mortgage market is, in our view, overblown."
Overblown? Not according to Banc of America Securities analyst Robert Lacoursiere, whose track record on the subject, as of now, is better than Perry's. In the spring of 2006, when the mortgage market was still firing on all cylinders, Lacoursiere downgraded IndyMac to a sell. The lender had just beaten estimates with stronger-than-expected originations. But with the stock hovering at a record high of around $50, Lacoursiere thought it was too expensive given what he believed would be "an impending cyclical downturn" in the mortgage industry.
Since then, as the mortgage industry has gone through something a bit more than a mere cyclical downturn, causing IndyMac's stock to lose 55% of its value as its financial performance has slumped. As IndyMac has moved to adapt,. Lacoursiere hasn't been impressed. For example, last month the company said it was laying off 4% of its work force. Lacoursiere said that "signals management's realization that they won't be able to outgrow the problem."
The company again, showing its unabashed optimism has since said it is hiring about 200 laid-off executives from American Home Mortgage Investment Corp., which has filed for bankruptcy protection.
Lacoursiere feels so strongly about IndyMac that he headlined one of his reports, "The basis for optimism is sheer terror," after one of Oscar Wilde's most famous quotes. Then citing the Lord Henry character in "The Picture of Dorian Gray," he added, "We think (IndyMac's) optimism reflects their fear of what would occur otherwise, making it a hope to avoid the negative outcome." Perry, though a spokesman, declined to comment, instead referring me to the company's blog. Time will tell whether his optimism was hope or hype. |
