In a letter to shareholders published today, IndyMac Bancorp, Inc. (NYSE:NDE) CEO Micheal Perry addressed the industry challenges that have impacted the Pasadena, Calif.-based mortgage operation and said that the company will no longer focus on its thrift operations. The company's retail operations had in the past been largely tied to its thrift business, although the company did not comment on its plans for retail branch operations going forward. In explaining the company's decision to focus mostly on mortgage production and servicing, Perry cited what he characterized as a "dramatic" decrease in the ROE in the company's thrift segment, mostly caused by net interest margin erosion in IndyMac's whole loan and MBS portfolios. "There is fierce competition for consumer deposits, particularly as Wall Street firms and other non-bank entities have over the years made significant inroads in attracting deposits away from banks and thrifts by paying high rates on money market funds," Perry said. "In addition, consumers, assisted by the Internet and deposit insurance, are getting more savvy and efficient with their deposit funds, moving them to the highest yielding options. Both of these factors are driving up deposit costs relative to market funding sources and reducing the funding advantage and net interest margins of depository institutions." Perry also said he expects asset spreads to tighten over the long run, in addition to increasing regulatory capital requirements that are part of what the IndyMac chairman called a "broader trend" towards greater long-term market efficiency. "These changes in our business model and strategy represent fine-tuning more than a major strategic shift," Perry said.
IndyMac's shift comes as another thrift-based operation, Fremont General, said earlier this week that it will postpone its 4th quarter and full-year earnings releases. While the company has not provided a reason for the delayed earnings, industry sources have suggested to Housing Wire that the thrift is the latest subprime operation to buckle under the pressure of loan repurchases. "The new reality of narrowing net interest margins actually favors Indymac from a competitive standpoint in that, unlike many other depository institutions, we already have a relatively high, market-based cost of funds and have learned, through trading assets and loans in the secondary market, how to earn strong overall ROEs despite that fact." The IndyMac chairman also addressed the storm clouding over the subprime mortgage industry, saying "we need to be more forceful in standing up for ourselves as an industry." "We need to remember that foreclosures and credit losses are increasing off of record and unsustainably low levels and are returning to more normal levels now," he said. "As long as we have properly priced for credit risk and prudently distributed the risk into the secondary market – both of which we feel we have largely done, although not perfectly – our credit costs will continue to be manageable." For more information, visit
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