Countrywide, IndyMac Shares Are Cooling After Red-Hot Year

One of the few bright spots in last year’s dismal stock market was the financial-services sector, in which two big Southern California-based mortgage companies represented some of the biggest gainers.

Shares of IndyMac Bancorp Inc. of Pasadena rose 131% last year. Mortgage standby Countrywide Credit Industries Inc. of Calabasas saw its stock jump 99% in the same period.

Both companies looked to get an even bigger boost from the Federal Reserve’s move to lower interest rates at the start of this year--an action most in the home loan industry believe will set off another lucrative refinancing boom.

Yet since the beginning of the year, shares of IndyMac have fallen 11% and Countrywide’s have dropped 6%, leaving investors wondering if this is simply another example of the Wall Street adage “sell on good news” or if there’s something else afoot.

To be sure, both companies are victims of profit-taking. However, other factors indicate that the spectacular stock price run-ups at IndyMac and Countrywide might be over despite what’s expected to be solid financial performance in 2001.

“Barring some sort of takeover at a substantial premium, there is nothing on the horizon that would indicate these companies will have the type of advances in stock price that they had last year,” said Richard Eckert, an analyst with Sutro & Co. in San Francisco.

That’s because of the events that influenced both companies’ increases in share prices.

A massive share repurchase program, which saw IndyMac buy $244.5 million of its shares, or nearly 20% of its outstanding stock through the third quarter of 2000, juiced the online mortgage lender’s gains.

And takeover speculation through much of 2000--encouraged by Countrywide’s low stock price during the first half of the year--helped propel that company to one of its biggest gains in share price.

“My only issue with IndyMac is how much more room it has to run,” Eckert said. “It is trading at 15 times its estimated 2001 earnings and that’s pretty high for a cyclical, interest-rate-sensitive company.”

Although economists say the U.S. economy is slowing, mortgage lenders look to benefit from the Fed’s efforts to prevent a recession by lowering interest rates. On Jan. 3, the central bank cut the federal funds rate--the interest that banks charge each other for short-term loans--from 6.5% to 6%, the first reduction in more than two years.

Lower interest rates spark home purchases and refinances by homeowners looking to trim their house payments. Countrywide’s rate for a typical fixed 30-year loan of $275,000 or less is 7.13%, compared with 8% a year ago.

With IndyMac being the biggest buyer of its own shares--reducing its purchases to devote cash to expanding the company--most analysts expect IndyMac stock to gain 20% to 25% this year.

Charlotte Chamberlain, an analyst at Jefferies & Co. in Los Angeles, credits IndyMac for several strategic moves last year that will allow the company, the nation’s 22nd largest lender, to grab a bigger share of the home loan market.

IndyMac changed its corporate structure from a real estate investment trust to a chartered thrift after purchasing SGV Bancorp in July. The transformation allowed IndyMac to tap the deposits of a 10-branch system in Southern California and a Federal Home Loan Bank line of credit for funds to make home loans.

Michael Perry, IndyMac’s chief executive, said the moves reduced the cost of raising funds for lending by as much as half a percentage point.

Perry wants to expand IndyMac to become of the nation’s 10 largest mortgage lenders by 2003. To reach that goal, Perry said the company will have to acquire another mortgage bank company or thrift in the next year or so.

Through the first nine months of last year, IndyMac reported earnings of $68.4 million, a 44% increase from the same period in 1999 after adjusting for its conversion from the REIT format. Its stock closed Friday at $26.13, down 69 cents on the New York Stock Exchange.

What sets IndyMac apart from most other lenders is that roughly 80% of its business is conducted in some way over the Internet, either directly to consumers or through mortgage brokers.

“We don’t need a large branch network or loan officers out in the field,” Perry said. “That gives us fewer fixed costs.”

IndyMac does much of its business through its Electronic Mortgage Information Transaction System--a Web-based form with 55 fields for applicants to fill out. IndyMac computers analyze the answers and issue conditional approval within minutes. Applicants then have 20 minutes to lock in the rate.

Perry believes that the Internet will soon account for as much as 90% of IndyMac’s business, although it will be years before every aspect of lending is conducted electronically.

“Very few of our customers are able to complete the whole transaction on the Web. At some point they have to talk to us,” he said.

Countrywide, the nation’s third-largest writer of home loans, also reports a dramatic upswing in home loan financing. Last week, Countrywide said it wrote $1.9 billion in refinancing loans, almost double the volume of a year ago. Moreover, e-commerce now represents over 40% of Countrywide’s business, compared with 19% a year ago.

Through the first nine months of its fiscal year, Countrywide’s earnings fell 13% to $269.9 million. Its stock closed Friday at $47.06, unchanged on the NYSE.

“As we look forward, we think our stock can go higher with more interest rate cuts and a refinancing boom,” said Eric Sieracki, Countrywide’s managing director of corporate finance.

Countrywide is one of two top-10 lenders not linked to a bank or thrift. But it expects to obtain a bank charter within months, which will put it on an even playing field with the other big mortgage companies.

“That will help us transform into a more diversified financial-services company by offering standard banking products to our customers,” Sieracki said.

Even so, takeover speculation remains.

“Someone like Wells Fargo would be a perfect fit,” Eckert said. “It’s a bank and would be able to cross-market to the 2 million loan accounts that Countrywide has.”