IndyMac Bancorp, once a leader in the nontraditional home loans that helped drive the housing boom, all but quit the mortgage business Monday and said it would lay off 3,800 people, more than half its staff, in the wake of growing defaults by borrowers.
The Pasadena-based savings and loan became the latest in a series of major Southern California-based lenders that have been absorbed by other companies or have simply been forced to stop making home loans, often shutting down altogether.
IndyMac said it would close nine regional loan offices, including four in California, that made loans through independent brokers -- its main business. It also plans to close about 150 retail offices in the West and Northeast that made loans directly to borrowers.
"While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets," Chief Executive Michael W. Perry said in a statement on the company's website.
The company, which before Monday had 7,200 employees, will have 3,400 after the cutbacks, down from more than 10,000 at its peak in 2006. It declined to specify the number of jobs to be lost in California.
Employees leaving the headquarters late Monday declined to comment, saying they had been asked by the company not to discuss the cuts. An IndyMac manager, speaking on condition of anonymity at a nearby Ralphs store, said simply, "There's not enough food to feed the mouths."
IndyMac's woes are a reflection of the financial industry's persistent troubles from the mortgage meltdown and the resulting credit crisis. Big Wall Street firms continue to record billions of dollars in losses on mortgage-related debt. And the stocks of government-sponsored mortgage giants Fannie Mae and Freddie Mac on Monday sank 16% and 18%, respectively, after an analyst said they could be forced to raise a total of $75 billion in fresh capital.
Of the independent mortgage lenders that once dotted Southern California, the few that remain are struggling with rising defaults and shrinking capital, including Downey Financial Corp. in Newport Beach and FirstFed Financial Corp. near Playa Vista.
IndyMac was started in 1985 by Angelo R. Mozilo and David Loeb, who together had founded Countrywide Financial Corp., and grew to be the second-largest independent mortgage lender after Calabasas-based Countrywide, which was acquired by Bank of America last week.
The Pasadena-based lender was the outright leader in "alt-A" mortgages -- those made to people with decent credit on terms that fell short of prime mortgage standards. Many borrowers, for example, were allowed to state their income without proof. And many of the loans were "pay option" adjustable-rate loans, or "option ARMs," which allowed a homeowner to pay so little each month that the loan balance grew instead of shrinking. IndyMac also made home-equity loans and sub-prime mortgages -- types of loans that have been beaten up badly by defaults.
The problem with IndyMac's product line was that borrowers often used such loans to turn their homes into ATMs, refinancing from time to time as long as housing prices were rising. When prices stalled and then plunged, defaults surged.
"When all was said and done, IndyMac had specialized in a category of loans -- option ARMs, alt-A, home equity -- that were used by borrowers to strip equity out of homes and live on it, especially from 2004 to 2007," said Frederick Cannon, an analyst at Keefe, Bruyette & Woods.
"When home prices began falling, these borrowers lost their income -- the appreciation in their homes -- and their ability and interest in paying back their loans," Cannon said.
Critics contend that IndyMac and other lenders, backed by Wall Street firms that bought loans to create mortgage bonds, brought about their own downfall by encouraging loan agents and independent brokers to promote unconventional financing features to get borrowers into loans they ultimately couldn't afford.
The Center for Responsible Lending, an advocacy group, said in a report last week that "unsound and abusive mortgage lending" had fueled IndyMac's boom and bust. IndyMac called the report a "hit piece" that recited anecdotal complaints from "a handful" of IndyMac customers and disgruntled employees who have filed lawsuits against the thrift, including one in which the Center for Responsible Lending is a plaintiff.
Last year, after funding from Wall Street dried up, IndyMac shifted its strategy, saying it would make mostly so-called conforming loans that could be sold to Fannie Mae and Freddie Mac. But that move failed to generate enough income to offset the growing losses on bad mortgages already made.
The company lost $693 million in the six months ended March 31 and said Monday that its red ink had continued in the latest three months, causing regulators to cross it off the "well capitalized" list and demand changes.