Markets & Finance

A Web-Savvy Mortgage Lender


By Erik Eisenstein For the U.S., 2002 has proven one thing: There's no place like home. A robust housing sector has helped prop up the economy in the midst of sluggish business spending. In particular, home lending has been a booming industry during this extended period of economic weakness. Consumers have seized on low mortgage rates, either to refinance existing debt or to purchase a residence. Standard & Poor's expects total mortgage-loan originations to hit their highest level ever in 2002, rising 8% to about $2.2 trillion. The projected increase reflects yet another refi boom in the third quarter, fueled by record low interest rates.

While we at S&P don't think the housing market will maintain this strength indefinitely, we believe one mortgage-related stock should generate steady growth even if housing's conditions cool somewhat: IndyMac Bancorp (NDE), a mortgage banker that carries S&P's highest investment ranking of 5 STARS (buy).

IndyMac offers multichannel distribution of its mortgage products and services through a nationwide network of mortgage brokers, mortgage bankers, and community financial institutions. It also offers programs directly to consumers and through realtors and homebuilders. Its IndyMac Bank unit provides community lending services through branches in Southern California.

SMART SOFTWARE. S&P believes IndyMac's state-of-the-art technology, which enables it to perform automated underwriting and risk-based pricing on a nationwide basis, gives it a competitive advantage over its peers. IndyMac was one of the first mortgage companies to move online, and its proprietary underwriting systems and supporting Web site have been praised as among the best in the industry. It plans to maintain that position through continual investment.

S&P views the migration toward online mortgage applications as a positive trend, especially for IndyMac. Its technological focus meshes well with its base of associated brokers. Indeed, brokers have embraced the online channel. The company's established relationships with the brokerage community also help ensure a consistent flow of business.

Assuming continued market-share gains, S&P thinks IndyMac's growth rate can be quite strong for years to come even though the mortgage market may taper off considerably in 2003. Though this market is inherently volatile, thanks to the vagaries of interest rates, S&P believes that mortgage production can grow at an average annual rate of approximately 11%.

COOLER, BUT STILL HOT. S&P thinks mortgage production at IndyMac will advance by approximately 10% in 2002, a bit ahead of the overall industry, which we believe can translate to earnings growth of approximately 20% for the year, to $2.40 per share.

But as the refinancing boom slows, we expect IndyMac's mortgage production to fall by nearly 20% in 2003 on fewer refinancings. Nevertheless, with projected greater net interest income on loans kept for investment and higher servicing fees, we project 2003 revenues to approximate those of 2002. Assuming lower production expenses, and the absence of costs associated from the opening of a new regional center, earnings per share in 2003 should advance by an additional 12.5%, to $2.70.

But even though IndyMac's prospects are solid, the shares appear to be unjustly depressed. Based on the recent price, they traded at only seven times S&P's 2003 earnings-per-share estimate. Applying a price-to-earnings-to-growth rate (PEG) of 0.8, which is in line with most of IndyMac's peers, S&P calculates a target share price of $28, which implies strong potential appreciation from recent levels. Analyst Eisenstein follows banking stocks for Standard & Poor's


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