The $1 trillion-a-year home loan industry is in the midst of a shakeup, fueled by an increasing number of consumers picking and choosing their mortgages online.

Rapidly developing technology is enabling homebuyers to finance this most momentous of acquisitions over the Internet. And leading the way in providing these loans is IndyMac Bancorp Inc. of Pasadena.

Despite having 10 brick-and-mortar branches, IndyMac bills itself as an Internet-based institution, and the numbers bear that out. In the third quarter ended Sept. 30, the most recent period for which statistics are available, IndyMac made $2.7 billion in loans, $2.5 billion of which were mortgages and $1.95 billion of which were made over the Internet.

The company has the No. 1 mortgage Web site, according to Internet measurement firm Gomez, and is growing at an impressive clip, with more than $5 billion in assets, compared with about $700 million seven years ago. With a lending mini-boom predicted by many in the wake of the lowering of interest rates by the Federal Reserve, IndyMac seems poised to benefit.

“We are doing $1 billion in lending a month, 90 percent of which is to families and 85 percent of that is over the Web,” said Chief Executive Michael Perry. “This is where the business is heading; there’s no way to stop it.”

The speed at which IndyMac has become the de facto standard for Internet mortgage lending may seem fast, especially given that it transformed itself from a real estate investment trust to a deposit-based thrift only a year and a half ago. But several analysts agreed that it is pioneering an approach that will have to be emulated by larger institutions in the not-too-distant future.

“The prospects for the company short term are very, very good,” said Gary Gordon, managing director at UBS Warburg. “They get high marks for their management. I’m particularly impressed by their ability to look ahead.”

Looming competition

As his remarks imply, the lender is likely to be challenged in the next few years as other institutions copy IndyMac’s successful use of online technology to make home loans. But Gordon also points out that IndyMac started pioneering its approach far ahead of the competition, which bodes well for its ability to face those challenges.

“The reason they’ve been so successful in the Internet is steps they took three, four years ago,” Gordon said. “They’re still thinking ahead.”

That optimism is shared by Wall Street. Over the past 12 months, IndyMac’s stock price has jumped from around $10 a share to a record high of $30.44. As of late last week, it had edged back to around $26.

“They’re very good at what they do, and when you’re good at what you do you’ll be rewarded,” said Richard Eckert, a banking analyst at Sutro & Co. “If you execute, if you deliver, you’re going to win.”

The lender’s success hasn’t come without struggle. It was started in the mid-1980s by Countrywide Credit Industries Inc. as a mortgage REIT, and for many years was run as something of an afterthought. Perry came on board in 1993 to revive IndyMac at a time when it had only four employees, almost no profit and a share price of less than $5.

In addition to making home loans, he revamped the business by buying and securitizing so-called jumbo loans, which are those larger than $227,150. The company performed fine until 1998, when the global financial crisis sent interest rates all over the map and caused investors to shy away from mortgage-backed securities.

The inability to access the capital markets was especially hard on IndyMac, which as a REIT was obliged to pass on its earnings to investors through dividends and had no other means of financing.

Defining moment

In the fourth quarter of 1998, the company lost $73.7 million (98 cents per diluted share), its first such loss. That caused Perry to conclude that, for IndyMac to survive, it needed to change to a depositary institution so it could have cash at hand. At the same time, management was experimenting with Internet-based technology as another way to provide service, a move that few others were contemplating at the time.

“I remember hosting a lunch for Mike here three, almost four years ago, when (IndyMac) was beta-testing this,” said Kenneth Posner, principal at Morgan Stanley Dean Witter. “They were ahead of the curve.”

“Like every good strategy, it started out of fear,” Perry said with a chuckle.

In 1999, IndyMac announced plans to convert itself from a REIT to a thrift through the $63 million purchase of First Federal Savings & Loan Association, a deal that was completed last July, giving it a welcome capital infusion.

“It immediately created $400 million of excess capital,” Perry said.

It also resolved its relationship with progenitor Countrywide Credit, to which it had been paying annual consultant fees, buying out Countrywide’s stake in IndyMac for $80 million last year.

The thrift used some of its cash to buy back its own shares, and has made $150 million in paper profit as the stock has risen. With cash reserves of around $250 million, IndyMac is exploring strategic acquisitions, one or two of which are likely to occur in the next couple of years, Perry said.

Of course, with Internet lending growing in popularity, larger institutions are likely to enter the business as well, which could eventually cut into IndyMac’s competitive advantage. But Perry continues to be ambitious, forecasting that his thrift will be one of the top 10 mortgage lenders in the United States by 2003. It is currently ranked No. 22.

“The problem with big lenders taking us on is that (Internet lending) took us four years to perfect,” he said. “The only reason they don’t want to implement this is because it’s hard.”