IndyMac’s hybrid thrift/mortgage banking business model provides a strong framework for growth over the long-term and the flexibility to operate in a wide variety of interest rate environments. Within this model we are focused on providing the financing for the acquisition, development and improvement of single-family homes.

As a mortgage banker, we originate mortgage loans for sale to investors. Our mortgage banking activities are characterized by a higher asset turnover rate than a traditional savings and loan and more efficient utilization of capital. Revenues generated by our mortgage banking activities include gain on sale of mortgage loans, fee income and net interest income during the period of time loans are held pending sale. Mortgage banking activities are characterized by higher returns on invested equity, but can be cyclical in nature. Mortgage loans may be sold as whole loans to other financial institutions, sold in bulk to government sponsored enterprises—such as Freddie Mac and Fannie Mae—or securitized and sold to investors in mortgage-backed securities.

As a thrift, we also originate loans to be held for investment on our balance sheet, which capitalizes on our ability to raise deposits and access the Federal Home Loan Bank system to finance these assets efficiently. Such investing activities provide a source of revenues that is generally counter-cyclical to mortgage banking revenues. These revenues consist primarily of interest income and servicing fees over the life of the loans. IndyMac is strategically focused on increasing the relative size of our portfolios of prime mortgage and home equity loans, as well as mortgage servicing rights, to achieve greater balance between our mortgage banking activities and our investing activities. We believe that our investing activities will increasingly act to stabilize IndyMac’s core income.

Prudent allocation of capital between our mortgage banking and investing activities in varying interest rate environments tends to stabilize earnings through the mortgage cycles. In periods of declining interest rates, we allocate more capital to our mortgage banking activities as lower interest rates create increased demand by consumers to refinance higher rate mortgage loans. In such periods, we would expect to see stronger revenues and returns on invested equity from our mortgage banking activities and lower relative returns on our investing activities as prepayments resulting from the refinancing trends that are occurring shorten the lives of these assets. Conversely, in periods of stable to rising rates, we tend to allocate more capital to our investing activities as mortgage refinancing activities slow. During this time we would expect to see improved returns on equity in our investing activities as the duration of our investments extends with lower prepayments while the returns in our mortgage banking activities would be expected to decline.

IndyMac’s three main segments, IndyMac Mortgage Bank, IndyMac Consumer Bank and the Investment Portfolio Group, each have operations that encompass our mortgage banking activities and investing activities as shown on the following page.