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IndyMac Drenched by Losses

IndyMac Bancorp (IMB) shares rose Tuesday even after the lender slashed its dividend and posted its first quarterly loss in nine years.

The mortgage company posted a third-quarter loss of $202.7 million, or $2.77 a share -- a deficit six times as big as analysts were expecting. Revenue plummeted to a negative $42.3 million from $346 million in the comparable period last year.

IndyMac had warned in early September that it was firing 10% of its staff and slashing its dividend. The company had said at the time that it expected to post a third-quarter loss of as much as 50 cents a share.

The Pasadena, Calif.-based company said credit costs totaled $407.7 million, or $3.40 a share, in the third quarter. Also, because of widening spreads in the secondary markets for mortgage-backed securities, IndyMac took a loss of $167.2 million on the sale of loans that were not eligible to be sold to Fannie Mae or to Freddie Mac; this hurt earnings by $1.39 a share.

The company also cut its dividend in half to 25 cents a share and warned that it could cut it further if the company is not profitable in the fourth quarter.

"While this loss is substantially higher than we had been forecasting, it was clearly not unexpected given the magnitude of the losses being reported by others in the industry and the recent decline in our stock price," said Michael Perry, IndyMac's chief executive. "No one in the mortgage industry came away unscathed in the quarter."

IndyMac's poor earnings come on amid a surge of writedowns across the financial sector. As the markets for mortgage-backed securities froze up this past summer, lenders including Countrywide Financial (CFC) were forced to sell stock and tap bank lines to raise the cash they once got in the market.

Shares of IndyMac are down more than 70% this year, while Countrywide is off by 65%. IndyMac's stock was most recently up $1.31 to $14.09. Countrywide rose 13 cents to $14.91.

In terms of liquidity, IndyMac fared a bit better than other lenders. The company said Tuesday that operating liquidity totaled "an all-time high" of $6.3 billion, up from $4.1 billion in the second quarter, primarily driven by an increase in deposits through its thrift operations. IndyMac also paid off "all of its extendable, asset-backed commercial paper and reverse repurchase lines of credit," so that 95% of its borrowings come from deposits, Federal Home Loan Bank advances and long-term debt.

As of the third quarter, it began only making loans that were eligible to be sold to Fannie Mae and Freddie Mac.

"Though we maintained a strong overall financial position, we could have performed better even with the very tough environment had we not followed our major competitors and expanded so significantly during the housing boom, especially with respect to seconds, HELOCs and piggyback loans," Perry said. "We, like most others, underestimated the length and severity of the housing downturn, and in hindsight, we could have 'pulled back' in our lending sooner."

Perry's outlook comments as well as the company's liquidity position "just sort of opened the survivability room," says Matt Howlett, an analyst at Fox-Pitt, Kelton.

IndyMac's "prognosis and their outlook is better than a lot of the doomsayers are thinking," Howlett says. "The shorts are scared."

Perry expects IndyMac's GSE-oriented mortgage production business to be profitable in the fourth quarter, excluding credit costs and other expenses. He expects retail lending overall to be profitable in the first quarter of 2008.

Shares rose 60 cents to $13.37.

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