IndyMac turns the corner

IndyMac (IMB) rose 16% in early trading Thursday, a day after the mortgage lender’s CEO said in a note to employees that he believes the company has “turned a corner” and is seeing improving business. CEO Mike Perry wrote on IndyMac’s blog that the company expects to see credit costs drop sharply in the first quarter from the fourth-quarter level of $863 million - a notable comment because other lenders have been forecasting increasing credit costs. While IndyMac still expects to post a first-quarter loss, Perry says it will be substantially narrower than the fourth-quarter loss of $509 million, or $6.43 a share.

“Our forecasts show continued declines in credit costs and in our overall losses each quarter for the remainder of the year,” Perry wrote. “While mortgage production is a struggle in the current environment, we continue to successfully convert our production to a GSE/FHA/VA model,” he added, referring to the government-backed mortgage agencies that have become the main investors in mortgage-backed securities since demand for privately issued mortgage bonds collapsed last summer. Fannie Mae (FNM) last month agreed to buy jumbo loans from private companies, in a deal IndyMac said it hoped “will encourage the private secondary market to return more quickly and confidently.” IndyMac has also been cutting jobs in a bid to keep costs in line with sharply lower mortgage originations.

While IndyMac says improving credit trends should allow it to weather the mortgage-industry storm, Perry warns that shoring up the bank’s balance sheet will continue to pressure the company’s shares, which have lost nearly 90% of their value over the past year. “To sustain sufficient capital levels to keep Indymac Bank safe and sound through this crisis period, we have been raising capital every day” through IndyMac’s direct stock purchase plan, Perry says - an action that, through the issuance of new shares, “itself puts pressure on our stock price.”