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IndyMac's New Strategy Puts Emphasis on Servicing

The chairman and chief executive of IndyMac Bancorp Inc. here, Michael W. Perry, sent a letter to stockholders which says the company will de-emphasize growth in its whole loan and mortgage-backed securities investment portfolios.

Instead, the letter says, "Our capital deployment and profit growth will be more focused in the future on the two broad segments of our mortgage banking business, mortgage production and mortgage servicing."

The company is seeing its return on equity decline in the whole loan and MBS portfolios. Part of the problem is tighter spreads.

IndyMac has a thrift subsidiary, which helps to fund its mortgage activities. But the competition for consumer deposits has increased, and consumer behavior, aided by the Internet, has changed, with deposit funds being moved to the highest-yielding options.

Mr. Perry called the changes "fine-tuning more than a strategic shift." He believes that the narrowing of net interest margins actually favors IndyMac because "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. Other financial institutions rely on their low cost of funds to achieve the same or lower ROEs as IndyMac, and, as their cost of funds advantage erodes, I believe they will struggle to sustain their performance levels."

The recent purchase of the retail mortgage platform of New York Mortgage Co. was part of its production growth strategy.

This year will be a down year for IndyMac's earnings per share although its return on equity, he said, should be between 10% and 15%.

In the letter, Mr. Perry also addressed the topic of nontraditional loans such as option adjustable-rate mortgages, interest-only loans and limited-document loans.

The mortgage industry needs to do a better job of telling the story of the benefits of these loans.

"Certainly, mortgage foreclosures and credit losses will increase in the current environment, and the percentage increases will look extremely high and get headlines in the press. But, 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.

"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," he said. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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