I am both for and against IndyMac Bancorp (IMB). On the one hand, I approve of IMB's broad banking practice and believe that the company is well prepared for the current loan debacle. On the other hand, I have to question its REO operations, as, in my opinion, IndyMac Bancorp is very foolish and conservative on this front. These are the facts as I see them and will defend my belief if there is a misunderstanding.
It seems to me that our banking industry is NOT improving its conventional REO practices. The industry hasn't changed a bit even though the advent of cyberspace has changed our lives dramatically over the last 10 years. The same chaos is here as it was in 1990 when we had the RTC crisis.
How can IMB use a Riverside or San Diego realtor to handle an REO located in Los Angeles? Don't they know that it will take at least 1 hour drive to get there? Do they expect a realtor to spend more than three hours just to show their REO to a potential buyer in the hopes of getting a commission check of $5,000?
It is not effective to give out an REO listing while asking a Los Angeles agent to take care of a property in San Francisco. However, that is very common among banks or. more precisely, a bank's asset management. Wells Fargo's (NYSE:WFC) website (pasreo.com) lists about 6,000 REO listings for California alone; you would be amazed to see how many authorized agents are so far away from their properties.
IMB has been more willing than others to put REOs on it websites. Virtually no one else in the financial service is taking advantage of the Internet to use company websites as a marketing channel to get rid of REOs. (There are traditional reasons for that, of course, including public image and self-protection, but I don't want to get into the details about that.)
U.S Bank (NYSE:USB) is one of the most aggressive banks to reduce its REO prices to cope with the future price trends. Instead of dreaming the top dollars at 2005-2006 peak prices, US Bank is positioning itself at a market edge to set a realistic price for others to follow. If you know RE appraisal business, you know that U.S Bank is a smart enough leader to set the market price. There is little chance of easily getting a better price than with U.S Bank.
For example, U.S Bank took in a Southern Californian REO at foreclosure minimum bid of $380K (the previous sale price was $520K) on July 13, 2007 and immediately priced it at $347.9K on the market, regardless of the fact that the property next door was sold for $440K right before the foreclosure. After two months, the price dropped to $324.9K. The first price reduction of $50K is about 15 percent off its listing price. I also witnessed that the bank took in a Texan REO at $82K last May, priced it at $49K and sold it for $37K last October.
In Texas and California, U.S Bank has acted as a real businessman, not a lousy and conservative banker, with the very good sense to deal with its REO inventory. But it nevertheless sticks to its conventional channels and has never treated its website as a market place. Visit U.S Bank's website and you will see there is only one REO property listed in California, and in central California at that, while there are no listings there for southern CA, despite the fact that that region has the majority of properties.
As I said before, I am a trash digger who doesn't mind to dig, dig, and finally dig a gold nugget out of many dumpsters scattered around many places. But why do all the banks have to make it a hassle to their potential customers by processing their disposal of REOs in a so-called conventional "BPO" or a bureaucratic "assets management"? Why they don't see the Internet advantage as a money saving method?
I believe that they are real patriotic heroes trying to "add" more red tape, "create" more jobs and "consume" more papers to increase our Gross Domestic Production. But those "productions" won't improve our "productivity" or "efficiency" to compete with others or add a real "constructive value" to our GNP. They are in fact purely a "consummated " waste in terms of global natural resources or our national strength.
Back to the REO strategy; IMB is too passive and conservative and I don't like what I see. I can do much better than that to make a non-performing asset (by name, it is an asset but it in fact really a debt) into a real performing asset! But IMB's REO operations tell me that IMB may not have an urgent liquidity issue or that IMB is trying to bluff in order to cover up such a disastrous pressure. I have no reason to believe that IMB is too stupid to see that a credit crunch is coming toward them, if there is one. However, I do believe that IMB has to send its REO asset managers to an advanced learning course.
But this is the personality of Mike Perry and his "balance sheet recession" mindset (prepare to conserve cash; "minimize losses", not "maximize profit".) It seems to me that Mike has been long ready to respond to IMB's possible loan loss and liquidity crisis, if any, from his previous experience. He is doing what he believes is right in a broad banking perspective. I don't blame him and I trust him on banking business; that is why my first stock purchase of all time was IMB at $5.91 on Dec. 21.
I wish IMB's stock price could be even lower so that I could buy more. So Mr. Cramer, may I ask that you do a better job creating a "strong sell" for IMB, please?
Disclosure: Author has a long position in IMB