IndyMac grew by issuing mortgages online, now it's opening branches.

Michael Perry thinks Wall Street is far too concerned about rising interest rates and the ability of homeowners to repay high-risk mortgages.

"The one thing I have a lot of confidence in is the American consumer in being able to be smart enough to make their own financial decisions," said Perry, chairman and chief executive of IndyMac Bancorp Inc., which is at the forefront of a mortgage industry that has become more aggressive during the housing boom.

Pasadena-based IndyMac was one of the first lenders to allow homebuyers to get a mortgage over the Internet, and some of its newfangled plans have no resemblance to the plain-vanilla fixed-rate mortgages of the past 25 years.

Perry, who joined the financial institution in 1993 when it had just four employees, is credited with creating a "hybrid model"--that is, combining a mortgage bank with the capability of an investment house that buys and sells pools of securitized loans.

The success of these products has helped catapult IndyMac to be the largest savings and loan institution in Los Angeles County, and the 12th-largest thrift in the U.S., with $19.4 billion in assets.

"They're definitely a different sort of animal," said Manuel Ramirez, a banking analyst at Keefe Bruyette & Woods. "They are actually fortunate because there haven't been many pure-play mortgage companies that have become regulated thrifts."

But with all the innovation comes risk.

Despite his "outperform" rating, Ramirez and other analysts question IndyMac's plan to open new branches in Southern California at the time that mortgage originations are slowing. The company expects to open as many as 80 branches in the next four years in an attempt to grow deposits--a cheap source of capital. that could then be put to use funding loans.

In that arena, IndyMac faces stiff competition.

Los Angeles already has 1,500 branches of competing thrifts, including Washington Mutual Inc., the nation's largest thrift with $335 billion in assets and the largest home lender in California.

"We're not talking about a radical model here, but doing something that a lot of lenders have been doing, but in a distinct way," said company President Richard Wohl, who helped build IndyMac's broker network.

IndyMac reported a 52 percent jump in second-quarter net income to $83.1 million, up from $54.6 million in the year-earlier period. Loan production hit $14.2 billion in the second quarter, up from $9.7 billion a year earlier.

'Fear and loathing'

IndyMac began life as a real estate investment trust, but ran into trouble in 1998 when capital markets hit a snag and the company ran out of funding. That year, it posted a $73.7 million loss.

Under the threat of collapse, Perry made the unusual decision of changing IndyMac's corporate structure by purchasing a federally regulated thrift. The purchase allowed IndyMac to both tap the deposits at its 10 newly acquired branches and get a line of credit from the Federal Home Loan Bank to continue funding home loans.

Since then, IndyMac has led the boom in mortgage originations over the Internet by creating an electronic system that allows potential homebuyers to fill out a Web-based form with 55 questions. The application can be analyzed within minutes for quick approvals.

IndyMac's expansion comes just as the housing boom appears to be peaking. Last month, mortgage companies received a drubbing on Wall Street after several years of record stock performance.

Bank of America Securities analyst Robert Lacoursiere sparked a sell-off last month when he downgraded Calabasas-based Countrywide Financial Corp. to "sell" from "neutral," and IndyMac and Oakland-based Golden West Financial Corp., the parent of World Savings Bank, to "neutral" from "buy."

"We think market sentiment for mortgage sector stocks will be increasingly characterized by fear and loathing," Lacoursiere wrote in a research note, citing "rising anxiety and difficulty gauging the scope and impact of prospective origination declines."

Shares of IndyMac have fallen 15 percent in the past month to $39.39 each, causing investors to become slightly nervous as the stock's momentum stalls.

A few analysts have expressed concerns about the high percentage of option-ARMs issued to California homebuyers, especially with indications that the Federal Reserve will continue to hike short-term interest rates.

As much as 37 percent of IndyMac's single-family loan production--a total of $900 million on its balance sheet--comes from option-ARMs in which borrowers have the option to pay interest only, or pay interest and principal, or make a minimum payment. If they choose the minimum, they are deferring not only principal payments but also interest payments as well. This results in negative amortization--adding to a homeowner's total mortgage debt instead of reducing it each month.

IndyMac executives and some Wall Street analysts don't see the ARM loans as a big problem, figuring that consumers will switch to fixed rates as interest rates rise.

"While many on the Street continue to fret about pay-option ARMs and the negative amortization feature, we remain very positive on the product's interest rate and credit characteristics," Paul Miller, an analyst at Friedman Billings Ramsey & Co., wrote in a recent report.

Wohl, IndyMac's president, argues that credit cards have been charging negative amortization to borrowers for decades with very little fallout or criticism. Moreover, homeowners actually have an asset that is likely to appreciate and the interest on it is tax deductible.

"We have financially sophisticated borrowers who have a high degree of understanding what they're getting into," he said. "Only a small proportion of borrowers take the negative amortization option anyway."

Meanwhile, Perry has set yet another ambitious goal of growing the company to become one of the top eight mortgage lenders in the United States by 2008. He said the trend in which consumers are using their homes as a financial asset will help fuel that growth.

"There's almost a view that these consumers are irresponsible, and I just don't see that," he said.

IndyMac Bancorp Inc.

Mortgage Loan Production (billions)

9/03           $8.7
12/03          $6.6
3/04           $7.1
6/04           $9.7
9/04          $10.6
12/04         $11.6
3/05          $11.6
6/05          $14.2

Net Income (millions)

9/03          $49.7
12/03         $43.3
3/04          $41.9
6/04            $23
9/04          $49.7
12/04         $55.9
3/05          $65.5
6/05          $83.1

Source: Company fillings

Note: Table made from bar graph.