IndyMac Bancorp Inc. has scrapped a plan to partially spin off the reverse mortgage company it majority-owns, the leader in that hot senior-citizen lending niche.
Instead, the Pasadena, Calif., thrift company has agreed to pay $40 million for the 6.25% of Financial Freedom Senior Funding Corp. that is still owned by that company's longtime chairman and chief executive. The price is almost half of what IndyMac paid two years ago for the other 93.75%.
In an interview Wednesday, Michael Perry, IndyMac's chief executive, said that after spending around $600,000 studying the idea of a spinoff, his company decided it did not want to leave Financial Freedom without the scale and resources to thrive at a time of increasing competition - a situation faced in the past by subprime and dot-com lenders.
"A lot of them went public, and not many of them are succeeding," he said. Financial Freedom "hasn't really had to deal with" its business becoming much more commoditized, as IndyMac has.
IndyMac, which Countrywide Financial Corp. spun off in the 1990s, also said it wanted to avoid potential conflicts. It plans to make reverse mortgages through its own distribution channels, and it did not want to have Financial Freedom bidding against others to buy the loans without some offsetting benefit.
Such a scenario "sounds a lot like the conflict we had when we were affiliated with Countrywide" a few years ago, Mr. Perry said.
The Federal Housing Administration insures the vast majority of reverse mortgages, but Financial Freedom also has a unique menu of "jumbo" versions. The company, which uses the actor James Garner as a spokesman, had a market share of about 56% in the first quarter.
The idea of an initial public offering surfaced in an April conference call, when Mr. Perry rated the odds at "75% to 90%." A week later IndyMac said its board had authorized it to evaluate and plan for a sale of 20% of Financial Freedom in an IPO.
IndyMac bought its 93.75% stake and certain assets from Lehman Brothers in July 2004 for about $84.6 million. (What IndyMac would pay for the remaining stake values Financial Freedom at $640 million.)
From the third quarter of 2004, its first under IndyMac, to the first quarter of this year, Financial Freedom's profit doubled, to $8 million, and its volume more than doubled, to $1.1 billion.
On the April call, Mr. Perry said an IPO would let IndyMac "recruit and retain management talent, because they can get options in Financial Freedom, and it also encourages that management team to run like hell to build that business."
Along with selling his stake, James Mahoney, Financial Freedom's CEO until this week, agreed to remain the chairman through 2011 (with his salary never less than $500,000) and take on a new co-CEO role until yearend.
Michelle Minier, who had been IndyMac's executive vice president of central mortgage operations, was also named a co-CEO. She will become the sole CEO at yearend.
In the past year dwindling volume and profitability in traditional home lending, coupled with demographic trends favoring the reverse business, have lured many companies into a niche long dominated by a handful of lenders.
Countrywide, the top home lender, plans to begin offering reverse mortgages soon. A National Reverse Mortgage Lenders Association spokesman said it expects 600 to 650 attendees at its conference in September, compared with slightly fewer than 500 last year.
Until very recently the secondary market for reverse mortgages was almost entirely limited to Fannie Mae. But that is changing - another reason IndyMac said a close link with it would benefit Financial Freedom.
On Wednesday, Mr. Perry said the reverse lender has started to sell FHA-insured loans to another investor, which he would not name. Financial Freedom has a contract to sell its jumbos to Lehman for one more year, and it will try to issue its own securities, he said.
Paul J. Miller, an analyst at Friedman, Billings, Ramsey & Co., wrote in a research note that IndyMac probably will write up Financial Freedom by between $89 million and $129 million, to reflect the price of Mr. Mahoney's stake, which he called "a little steep."
In an interview, he said, "If they did an IPO, I think it would have been very difficult to get that type of multiple for it."
