Moody's may cut IndyMac to junk, affirms WaMu

By Jonathan Stempel

NEW YORK, Aug 27 (Reuters) - IndyMac Bancorp Inc IMB.N may be downgraded to junk status by Moody's Investors Service, which said on Monday that difficult mortgage market conditions may hurt profit at the ninth-largest U.S. mortgage lender for a few quarters.

Separately, Moody's affirmed its medium investment-grade rating for Washington Mutual Inc (WM.N), the nation's largest U.S. savings and loan and sixth-largest mortgage lender.

Moody's said it may cut IndyMac's "Baa3" issuer rating, its lowest investment grade, and the "Baa2" rating for its IndyMac Bank unit.

"Investor demand for non-agency product has declined severely over the past month and Moody's expects write-downs on IndyMac's inventory to be large in the third quarter," Moody's Senior Vice President Sean Jones wrote. "These potential write-downs, and the significant drop in residential mortgage loan origination and sales volumes, is likely to weigh on the thrift's profitability for a few quarters."

Mortgage lenders have struggled with tighter credit markets as investors, fearful of rising delinquencies, stopped buying a wide variety of home loans, including many once thought safe. Many have tightened their lending standards this year, and dozens have quit the industry.

Pasadena, California-based IndyMac, which specializes in "Alt-A" home loans, which fall between prime and subprime in quality, said it resumed making residential "jumbo" home loans last week, and traded its first mortgage bonds in five weeks.

Moody's said its review will focus on IndyMac's ability to maintain its franchise and financial metrics. IndyMac made $48.1 billion of home loans from January to June, for a 3.4 percent market share, according to newsletter Inside Mortgage Finance.

The credit rating agency affirmed Seattle-based Washington Mutual's "A2" senior debt rating, its sixth highest investment grade, with a stable outlook.

Moody's Jones wrote that Washington Mutual will face "poor" results in its mortgage business through 2008, but that good liquidity and earnings from its retail bank and credit card operations will cushion the impact. The thrift's home loans unit lost $150 million in the first half of 2007.

Moody's also downgraded Fremont General Corp's FMT.N senior debt to "Caa2," a low junk grade, from "B3," citing low capital levels at the bank, and "increased uncertainty" the Santa Monica, California-based parent can meet its obligations.

Fremont was a subprime mortgage lender before quitting that business earlier this year.

IndyMac shares closed Monday down 35 cents at $23.65 on the New York Stock Exchange, and have fallen 48 percent this year. Washington Mutual shares closed down 98 cents at $36.64 on the NYSE, and are down 19 percent his year. (Additional reporting by Al Yoon)