July 8, 2008 / 6:27 PM / in 11 years

UPDATE 4-IndyMac depositors pull cash as mortgage woes grow

(Adds White House; capital ratios)

By Jonathan Stempel and Jennifer Martinez

NEW YORK/PASADENA, Calif., July 8 (Reuters) - Mortgage lender IndyMac Bancorp Inc IMB.N said on Tuesday depositors had been withdrawing cash at an “elevated” pace since a key U.S. senator questioned its ability to survive the housing crisis.

IndyMac shares sank 38 percent to 44 cents. A collapse of the largest independent, publicly traded U.S. mortgage lender could prove a headache for U.S. regulators since more than $17 billion of its deposits carry federal insurance.

Paul Miller, a Friedman, Billings, Ramsey & Co analyst, said shareholders may be wiped out, citing IndyMac’s decision to stop most mortgage lending and inability to raise capital. Miller cut his price target for the stock to zero from $1.00.

“It’s hard to gauge how this situation will resolve itself,” said Christopher Wolfe, managing director at Fitch Ratings. “We see a high likelihood of some kind of regulatory intervention occurring, which could result in asset dispositions, or the thrift going into receivership.”

When asked if the White House was involved in interagency discussions or considering any action, a spokesman responded: “This is an issue for the Fed.”

Prospect Mortgage, a Northbrook, Illinois-based affiliate of private equity fund Sterling Partners, said late on Tuesday it agreed to buy more than 60 IndyMac retail mortgage branches, which employ 750 people, for an undisclosed price.

In a regulatory filing, IndyMac said it still faces “elevated levels of deposit withdrawals.” It pointed to comments in late June from Sen. Charles Schumer, who chairs Congress’s Joint Economic Committee, raising questions about a possible collapse. Schumer reiterated his concerns on Tuesday.

IndyMac said it was working with regulators on a new business plan after losing $896 million in the nine months to March 31. “We are aware of the situation and are working closely with the institution,” said a spokesman for the Office of Thrift Supervision, IndyMac’s main federal regulator.

Big mortgage rivals New Century Financial Corp NEWCQ.PK and American Home Mortgage Investment Corp AHMIQ.PK filed for bankruptcy protection last year. Countrywide Financial Corp, the top U.S. mortgage lender, avoided possible collapse when it was acquired last week by Bank of America Corp (BAC.N).

“In short, IndyMac was a junior version of Countrywide,” Schumer said in a statement on Tuesday.

“IndyMac fueled its growth through unsound lending practices,” the New York Democrat continued. “Regulators should consider ways to implement stricter oversight over the lending system so that there isn’t another IndyMac.”

IndyMac reported $17.3 billion of its deposits were insured by the Federal Deposit Insurance Corp. The FDIC has $52.8 billion in its insurance fund to cover bank failures.

FDIC Chairman Sheila Bair told the Senate Banking Committee last month that the housing downturn could cause “institutions of greater size than we have seen in the recent past to fail.”

SEEKING SECURITY

IndyMac set plans on Monday to eliminate 3,800 jobs, or 53 percent of its work force, and stop offering most home loans.

It also projected a larger loss in the second quarter than the $184.2 million loss it posted for January to March.

Regulators concluded the company is not “well-capitalized,” and IndyMac has about $1.7 billion of operating liquidity, a regulatory filing showed. A bank is considered well capitalized when it has an equity capital ratio over 6 percent.

IndyMac had a ratio of 5.76 percent on March 31. It needs to keep its capital ratio between 4 percent and 6 percent, according to Douglas Landy, a banking partner with law firm Allen & Overy, “in order to remain adequately capitalized and avoid being subject to greater regulatory sanction.”

U.S. banking law gives regulators increasing power over institutions as their capital levels dwindle over time.

IndyMac once specialized in “Alt-A” loans that often don’t require borrowers to document income or assets.

IndyMac’s $77 billion of mortgage loans in 2007 gave it a 3.2 percent market share, ranking ninth nationally, according to newsletter Inside Mortgage Finance. But as rates rose and home prices fell, many borrowers found themselves unable to refinance, and defaults surged.

IndyMac shares have skidded 99 percent in the past year, cutting its market value to $44 million from $3.3 billion.

HANGING IN

Fitch on Tuesday cut its issuer default ratings for IndyMac Bancorp to “CC,” a low junk grade, from “B-minus,” and for IndyMac Bank to “CCC” from “B.”

The rating agency also assigned IndyMac’s roughly $720 million of uninsured deposits an “average” recovery rating, suggesting uninsured depositors might get 31 percent to 50 percent of their money back.

Patricia Lannom, a retiree, said she decided to keep her $100,000 IndyMac certificate of deposit after employees at a branch in Torrance, California, said the funds were FDIC-insured.

“I think somebody will buy them if they go under,” she said. “What else can I do but hang in there?”

FBR’s Miller said the stock price might succumb to falling home prices, rising credit losses, rating agency downgrades, and IndyMac’s decision to curb lending. “We do not believe that there is any value left for common shareholders,” he wrote.

IndyMac faces several shareholder lawsuits that accuse it of misleading investors about its financial condition.

The company said it plans to keep offering reverse mortgages to older borrowers through its Financial Freedom unit, and operate 33 branches in Southern California. (Additional reporting by Dena Aubin and Martha Graybow in New York, and Rachelle Younglai in Washington, D.C.; Editing by Braden Reddall abd Andre Grenon)

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