IndyMac Bancorp: Time to Take REOs Online

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 (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 (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

Comments

[kale:]

confused... REO means what.......us bank bid 380K to price at 347K ,why... clear as mud unless written for realtors

2008 Jan 07 11:12 PM

[Rocktex:]

Hi! Kale,
Most content of the article are initially written for a professional real estate website. To better understand those professional jargons, you may go to the website or my blog at: activerain.com/blogs/r....

There are basically 3 stages in a foreclosure.
The 1st one is called NOD (Notice of Default) that means something real and serious starts legally.

The 2nd is called NOTS (or NOT in short) that means a date of foreclosure is scheduled legally.

A property in the above two stages are called "pre-foreclosure" property.

The 3rd is a foreclosure sale by itself. There is a foreclosure minimum bid amount for the sale. If nobody wants buy the subject property for that amount, there is no way for you to bargain it down, the property will be struck off and the title to the property is legally transfered to a lender at that instant. Of course, you can make a deal with the lender at the auction site right after the auction is completed. You may get less, but it depends the situation.

Once the foreclosed property belongs to a bank or lender, it is called a "REO" (real estate owned) by the general public. In fact, it is not correct, it shall be called "OREO" (other real estate owned) since some banks DO own some properties for its daily business operation.

Hope I make it clear. In this case, if someone is willing to raise his hand to pay $380K (the minimum bid for foreclosure sale), he will get and own the property, not the lender. The property will not be called a REO.

Since nobody wants to pay that price of $380K, the lender has to take it back as a REO and try to sell it by a more reasonable price. Sometimes, the asking price will be even higher than the minimum bid, after a 2nd junior lien or other liens are wipe out.

2008 Jan 08 12:04 AM

[Victhom:]

CEO planning to buy for $1.5M of shares.....

Shareholder’s Email:

Mike,

It’s been some time since we’ve had a chance to meet and talk. I’m a shareholder once again … While I realize that the decline in IMB’s stock price has been painful to you in many ways (not just financially) I think there can be no stronger message about the viability of IMB as an institution than significant insider buying at these depressed levels. If management can’t step up at these levels, then imagine what a “leap of faith” it must be for outsiders to purchase the stock at these levels. Thanks for taking the time to read my email in what must be an incredibly hectic time for you. Best of luck.

Mike Perry’s Response:

I completely agree with the point of your note. I think you know I bought $1 million of our stock earlier this year at $29. In addition, we have had a lot of other managers and some directors purchase this year, too.

Also, management and the board have lost more personally this year than anyone else by far…as most of us have not sold any stock or options in 2006 or 2007 (no sales from the CEO, President and CFO during this time). As a result, most of us are not in a personal financial position to purchase shares…even though we would like to.

With that said, management and certain key employees (about 130 employees total) have over $40 million in the deferred compensation plan, and the company has arranged to be able to “open this plan up” and for individuals to be able to use these funds to purchase IMB stock….and several of us, including myself, plan to do this (personally, I am planning to invest more than $1.5 million).

Unfortunately, our window for insiders to trade IMB stock is currently closed.

I would expect that the window will reopen once we release 4th quarter earnings in late January, and I would expect to see myself and other insiders purchase in a material way (for management) at that time. I hope that makes sense.

mike

2008 Jan 11 06:21 PM

[Edward Tseng:]

the decline in IMB’s stock price has been painful to you in many ways (not just financially).

**** **** ****
My dear,
The price fluctuation of a stock DOES NOT make any effect on the daily operation of a company issuing the stock.
The only chance for IMB as a business entity to get richer or poorer is the time IMB makes a public offering to get capital from the investors or public.
The sock price goes higher doesn't make IMB richer as a company. Conversely it does not make it poorer. No profit or loss for IMB gets in either conditions.
Thank you for letting me know the Q42007 report will be due by the end of January 2008. Yes, I believe it is a critical time for the change of future direction of IMB stock.
Basically before that point, everything happen is just "social sentiment" which may be not rational or can be controlled by IMB management.

2008 Jan 12 02:06 PM