IndyMac Bancorp 10Q 2007 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission file number 1-8972

INDYMAC BANCORP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		95-3983415 (I.R.S. Employer Identification No.)

888 East Walnut Street, Pasadena, California (Address of principal executive offices)		91101-7211 (Zip Code)

(Registrant’s telephone number, including area code)
(800) 669-2300

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common stock outstanding as of October 31, 2007: 80,488,799 shares

FORM 10-Q QUARTERLY REPORT
For the Quarter Ended September 30, 2007

TABLE OF CONTENTS


	Page

PART I. FINANCIAL INFORMATION
Forward-Looking Statements		3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		4
Overview		4
Selected Consolidated Financial Highlights		5
Summary of Business Segment Results		9
Consolidated Risk Management Discussion		33
Expenses		52
Prospective Trends and Future Outlook		53
Off-Balance Sheet Arrangements		53
Aggregate Contractual Obligations		54
Critical Accounting Policies and Judgments		54
Other Considerations		54
Appendix A: Additional Quantitative Disclosures		55
Item 3. Quantitative and Qualitative Disclosures About Market Risk		72
Item 4. Controls and Procedures		72
Item 1. Financial Statements (Unaudited)		73
Consolidated Balance Sheets		73
Consolidated Statements of Operations		74
Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss)		75
Consolidated Statements of Cash Flows		76
Notes to Consolidated Financial Statements		77

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		82
Item 1A. Risk Factors		82
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		83
Item 6. Exhibits		83
EXHIBIT 4.1
EXHIBIT 4.2
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

FORWARD-LOOKING STATEMENTS

Certain statements contained in thisForm 10-Q may be deemed to be forward-looking statements within the meaning of the federal securities laws. The words “anticipate,” “believe,” “estimate,” “expect,” “project,” “plan,” “forecast,” “intend,” “goal,” “target,” and similar expressions, as well as future or conditional verbs, such as “will,” “would,” “should,” “could,” or “may,” are generally intended to identify forward-looking statements that are inherently subject to risks and uncertainties, many of which are beyond Indymac’s control or cannot be predicted or quantified. Actual results and the timing of certain events could differ materially from those projected in or contemplated by the forward-looking statements or from historical results due to a number of factors, including, the effect of economic and market conditions including industry volumes and margins; the level and volatility of interest rates; Indymac’s hedging strategies, hedge effectiveness and asset and liability management; the accuracy of subjective estimates used in determining the fair value of financial assets of Indymac; the credit risks with respect to its loans and other financial assets including increased credit losses due to demand trends in the economy and in the real estate market and increased delinquency rates of borrowers; the actions undertaken by both current and potential new competitors; the availability of funds from Indymac’s lenders and from loan sales and securitizations to fund mortgage loan originations and portfolio investments including a reduction in secondary mortgage market investor demand; the execution of Indymac’s growth plans in a significant market transition; the impact of disruptions triggered by natural disasters; the impact of current, pending or future legislation, regulations or litigation; and other risk factors described in the reports that Indymac files with the Securities and Exchange Commission, including its Annual Report onForm 10-K, its Quarterly Reports onForm 10-Q, and its reports onForm 8-K. For further information on our risk factors, please refer to “Risk Factors” on pages 72 to 80 in Indymac’s annual report onForm 10-K for the year ended December 31, 2006 (“200610-K”) and Part II Item 1A “Risk Factors” on page 82. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. Indymac does not undertake to update or revise forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements are made.

References to “Indymac Bancorp” or the “Parent Company” refer to the parent company alone, while references to “Indymac,” the “Company,” or “we” refer to the parent company and its consolidated subsidiaries. References to “Indymac Bank” or the “Bank” refer to our subsidiary IndyMac Bank, F.S.B. and its consolidated subsidiaries. The following discussion addresses the Company’s financial condition and results of operations for the three and nine months ended September 30, 2007.


ITEM 2.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS*

OVERVIEW

The third quarter of 2007 was marked by an unprecedented disruption in the U.S. mortgage market. The private mortgage-backed securities market, as well as markets for asset-backed commercial paper and other financing markets came to a virtual halt during the quarter. This disruption had severe consequences for many mortgage originators. Many lenders that were not depository institutions failed or were severely disrupted. The impact of the market disruption appears to have significantly impacted the U.S. housing market as both sales of homes and prices are expected to decline in the future. Indymac’s results of operations were significantly impacted by the disruptions resulting in material reductions to revenue for both credit and market risks.

For the three months ended September 30, 2007, Indymac had a consolidated net loss of $202.7 million, representing a negative 39% return on average equity (“ROE”). Regarding business segment performance¹, the mortgage production divisions had a net loss of $123.6 million and a negative ROE of 67% in the third quarter while the mortgage servicing division had earnings of $85.3 million and a 85% ROE. Combining production and servicing, mortgage banking recorded a net loss of $50.5 million and a negative ROE of 17%. The thrift segment also recorded a net loss $104.4 million, representing a negative ROE of 45% for the third quarter. As a result of our thrift structure and strong capital and liquidity position, we were not forced to sell assets at liquidation prices and our funding capacity was not materially impacted.

¹ Net income for the mortgage production divisions, mortgage servicing and the thrift portfolio is before divisional and corporate overhead. Net income for total mortgage banking segment is after divisional overhead but before corporate overhead.

SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS

The following highlights the Company’s consolidated financial condition and results of operations for the periods indicated (dollars in millions, except per share data):


	Three Months Ended
	September 30,			June 30,			March 31,			December 31,			September 30,
	2007			2007			2007			2006			2006

Balance Sheet Information (at period end)(1)
Cash and cash equivalents	$	785		$	618		$	577		$	542		$	521
Securities (trading and available for sale)		5,732			5,608			5,253			5,443			4,950
Loans held for sale		14,022			11,762			10,511			9,468			8,341
Loans held for investment		8,553			8,648			8,988			10,177			10,030
Allowance for loan losses		(162	)		(77	)		(68	)		(62	)		(61	)
Mortgage servicing rights		2,490			2,387			2,053			1,822			1,631
Other assets		2,313			2,713			2,380			2,105			1,973

Total Assets	$	33,733		$	31,659		$	29,694		$	29,495		$	27,385

Deposits	$	16,775		$	11,747		$	11,452		$	10,898		$	10,111
Advances from Federal Home Loan Bank		11,095			10,873			10,350			10,413			9,333
Other borrowings		2,189			4,527			4,313			4,637			4,595
Other liabilities and preferred stock in subsidiary		1,803			2,462			1,525			1,519			1,409

Total Liabilities and Preferred Stock in Subsidiary	$	31,862		$	29,609		$	27,639		$	27,467		$	25,447

Shareholders’ Equity		1,871			2,050			2,055			2,028			1,938
Income Statement Information(1)
Net interest income	$	142		$	149		$	135		$	133		$	137
Provision for loan losses		(98	)		(17	)		(11	)		(9	)		(5	)
Gain (loss) on sale of loans		(251	)		101			118			165			160
Service fee income		213			86			49			22			21
Gain (loss) on MBS		(94	)		(46	)		(5	)		(4	)		19
Fee and other income		46			25			16			13			14

Net revenues		(42	)		298			302			320			346
Total expenses		(283	)		(224	)		(216	)		(211	)		(203	)
(Provision) benefit for income taxes		122			(29	)		(34	)		(36	)		(56	)

Net earnings (loss)	$	(203	)	$	45		$	52		$	72		$	86

Operating Data
SFR mortgage loan production	$	16,816		$	22,505		$	25,569		$	25,946		$	23,968
Total loan production(2)		17,062			23,023			25,930			26,328			24,439
Mortgage industry market share(3)		3.06	%		3.24	%		4.05	%		3.76	%		3.44	%
Pipeline of SFR mortgage loans in process (at period end)	$	7,421		$	13,376		$	16,112		$	11,821		$	14,556
Loans sold		13,009			20,194			24,537			23,417			19,508
Loans sold/SFR mortgage loan production		77	%		90	%		96	%		90	%		81	%
SFR mortgage loans serviced for others (at period end)(4)	$	173,915		$	167,710		$	156,144		$	139,817		$	124,395
Total SFR mortgage loans serviced (at period end)		192,629			183,574			171,955			155,656			139,022
Average number of full-time equivalent employees (“FTEs”)		9,890			9,431			8,755			8,477			8,186
Per Common Share Data
Basic earnings (loss) per share(5)	$	(2.77	)	$	0.62		$	0.72		$	1.02		$	1.25
Diluted earnings (loss) per share(6)		(2.77	)		0.60			0.70			0.97			1.19
Dividends declared per share		0.50			0.50			0.50			0.50			0.48
Dividend payout ratio(7)		(18	)%		83	%		71	%		52	%		40	%
Book value per share (at period end)	$	24.31		$	27.83		$	27.93		$	27.78		$	27.35
Closing price per share (at period end)		23.61			29.17			32.05			45.16			41.16
Average Shares (in thousands):
Basic		73,134			72,412			72,297			71,059			68,866
Diluted		73,134			73,976			74,305			74,443			72,286
Performance Ratios
Return on average equity (annualized)		(39.15	)%		8.62	%		10.45	%		14.56	%		18.27	%
Return on average assets (annualized)		(2.18	)%		0.50	%		0.60	%		0.85	%		1.17	%
Net interest margin, consolidated		1.78	%		1.92	%		1.77	%		1.76	%		2.13	%
Net interest margin, thrift(8)		2.37	%		2.29	%		2.11	%		2.09	%		2.50	%
Mortgage banking revenue (“MBR”) margin on loans sold(9)		(1.54	)%		0.80	%		0.68	%		0.91	%		1.03	%
Efficiency ratio(10)		483	%		71	%		69	%		64	%		58	%
Operating expenses to total loan production		1.58	%		0.97	%		0.83	%		0.80	%		0.83	%
Balance Sheet and Asset Quality Ratios
Average interest-earning assets	$	31,695		$	31,255		$	31,030		$	29,868		$	25,507
Average assets		36,833			35,837			35,341			33,765			29,140
Average equity		2,054			2,078			2,033			1,969			1,871
Debt to equity ratio (at period end)(11)		16.1:1			13.2:1			12.7:1			12.8:1			12.4:1
Tier 1 core capital ratio (at period end)(12)		7.48	%		8.10	%		7.41	%		7.39	%		7.60	%
Risk-based capital ratio (at period end)(12)		11.79	%		12.09	%		11.28	%		11.72	%		11.62	%
Non-performing assets to total assets (at period end)(13)		2.46	%		1.63	%		1.09	%		0.63	%		0.51	%
Allowance for loan losses to total loans held for investment (at period end)		1.89	%		0.89	%		0.75	%		0.61	%		0.61	%
Allowance for loan losses to non-performing loans held for investment (at period end)		47.64	%		36.07	%		44.11	%		57.51	%		77.43	%


(1)		The items under the balance sheet and income statement sections are rounded individually and therefore may not necessarily add to the total.

(2)		Total loan production includes newly originated commitments on builder construction loans as well as commercial real estate loan production, which started in March 2007.

(3)		Mortgage industry market share is calculated based on our total SFR mortgage loan production, both purchased (correspondent and conduit) and originated (retail and wholesale), in all channels (the numerator) divided by the Mortgage Bankers Association (“MBA”) October 17, 2007 Mortgage Finance Long-Term Forecast estimate of the overall mortgage market (the denominator). Our market share calculation is consistent with that of our mortgage banking peers. It is important to note that these industry calculations cause purchased mortgages to be counted more than once, i.e., first when they are originated and again by the purchasers (through correspondent and conduit channels) of the mortgages. Therefore, our market share calculation may not be mathematically precise, but it is consistent with industry calculations, which provide investors with a good view of our relative standing compared to the other top mortgage lending peers.

(4)		SFR mortgage loans serviced for others represent the unpaid principal balance on loans sold with servicing retained by Indymac. Total SFR mortgage loans serviced include mortgage loans serviced for others and mortgage loans owned by and serviced for Indymac.

(5)		Net earnings (loss) for the period divided by weighted average basic shares outstanding for the period.

(6)		Net earnings (loss) for the period divided by weighted average dilutive shares outstanding for the period.

(7)		Dividend payout ratio represents dividends declared per share as a percentage of diluted earnings (loss) per share.

(8)		Net interest margin, thrift, represents the combined margin for thrift, elimination and other, and corporate overhead.

(9)		Mortgage banking revenue margin is calculated using the sum of consolidated gain (loss) on sale of loans and the net interest income earned on loans held for sale by our mortgage banking production divisions divided by total loans sold.

(10)		Efficiency ratio is defined as operating expenses divided by net revenues, excluding provision for loan losses.

(11)		In the debt to equity calculation, debt includes deposits. Preferred stock in subsidiary is excluded from the calculation.

(12)		The tier 1 core capital ratio and risk-based capital ratio are for Indymac Bank and exclude unencumbered cash at the Parent Company available for investment in Indymac Bank. The risk-based capital ratio is calculated based on the regulatory standard risk weightings adjusted for the additional risk weightings for subprime loans.

(13)		Non-performing assets are non-performing loans plus foreclosed assets. Loans are generally placed on non-accrual status when they are 90 days past due.

NARRATIVE SUMMARY OF CONSOLIDATED FINANCIAL RESULTS

Three Months ended September 30, 2007 Compared to Three Months ended September 30, 2006

The Company recorded a net loss of $202.7 million, or $2.77 loss per diluted share, for the third quarter of 2007. This represents decreases of 335% and 333% in net earnings and earnings per diluted share, respectively, compared with the net earnings of $86.2 million, or $1.19 per diluted share, for the third quarter of 2006. The decline in profitability is mainly attributable to credit costs of $408 million versus $15 million in the third quarter of 2006, or a negative impact on earnings per share (“EPS”) of $3.40; unprecedented disruption in the private-label mortgage-backed securities (spread widening) which resulted in a reduction of expected gain on sale revenue estimated at $167 million for the third quarter, or a negative EPS impact of $1.39; and staff reductions that took place in the third quarter (over 1,500 positions) which resulted in a one-time, pre-tax charge to earnings of roughly $28 million, or a negative $0.23 EPS impact. These items were partially offset by strong hedging performance with respect to the mortgage servicing rights (“MSR”) asset which resulted in an additional $149 million in pre-tax servicing profits in the third quarter, or a positive EPS impact of $1.24; and the sale and leaseback of a commercial property which houses our mortgage banking headquarters which resulted in a $24 million pre-tax gain recorded in the third quarter of 2007, having a $0.20 positive EPS impact.

SFR Mortgage Loan Production

Our total SFR mortgage loan production for the third quarter of 2007 dropped 30% to $16.8 billion as compared to $24.0 billion for the third quarter of 2006, and 25% from $22.5 billion for the second quarter of 2007. This decline in volume is mainly reflected in the 74%, or $6.7 billion, drop in production from our conduit channel from the third quarter of 2006 as we scaled back production from this channel due to its inherently lower profit margins and the current uncertainty with respect to secondary market spreads and execution. Compared to the second quarter of 2007, volume from the conduit channel also declined 55%, or $2.9 billion. Our core mortgage professionals group (excluding the conduit channel) produced $11.3 billion in the third quarter of 2007, reflecting a reduction of 4% and 15% from the third quarter of 2006 and second quarter of 2007, respectively. Our retail channel, now part of the core mortgage professionals group, continues to grow with production reaching $546 million this quarter, up 45% from the second quarter of 2007. While the servicing retention channel saw a decline of 29% from the second quarter of 2007, production increased 46% from the third quarter of 2006 to $1.1 billion. The pipeline of SFR mortgage loans in process ended at $7.4 billion, down 49% from $14.6 billion at September 30, 2006, and 45% from $13.4 billion at June 30, 2007.

Mortgage Banking Revenue Margin

Our MBR margin declined to a negative 1.54% for the quarter ended September 30, 2007 from 1.03% for the quarter ended September 30, 2006, and 0.80% for the quarter ended June 30, 2007. This year over year MBR margin decline was primarily due to higher credit costs and spread widening caused by the secondary market disruption. Notwithstanding the disruption, we sold $13.0 billion and recorded a net loss on sale of $251.1 million in the third quarter of 2007 (including the credit losses discussed below). By comparison, we sold $19.5 billion, which generated $160.2 million in gain on sale during the same period last year. Substantially all of the credit and spread widening costs were unrealized as we were not forced to liquidate any assets due to liquidity concerns.

Delinquencies and foreclosures significantly worsened in the third quarter of 2007 in our total servicing portfolio. As a result, a total of $408 million in credit related charges was recorded during the third quarter of 2007. The lower of cost or market (“LOCOM”) mark-to-market valuation reserve on loans held for sale (“HFS”) increased from June 30, 2007 by $225.9 million to $338.9 million at September 30, 2007. Due to the disruption in the secondary mortgage market, our HFS loans increased to $14.0 billion as the market for certain products stopped functioning. As a result of our thrift structure, our capital and liquidity position allowed us to retain loans held for sale in the third quarter when many of our peers were forced to sell assets to meet margin calls. We expect to transfer a portion of these loans to be held for investment (“HFI”) in the next two quarters.

Other Credit Costs

For the HFI portfolio, provision for loan losses increased to $98.3 million for the third quarter of 2007 from $5.0 million for the third quarter of 2006, with the most significant increase in our homebuilder division’s portfolio. We recorded $72.8 million in credit related valuation adjustments to our residual and non-investment grade MBS portfolio. We also recorded a $32.0 million reduction in gain on sale revenue to increase our secondary market reserve.

Mortgage Servicing Performance

We had a strong performance from our Mortgage Servicing Division in the third quarter of 2007. This division benefited from the financial instruments we used to hedge against decline in market interest rates. Moreover, the value of our mortgage servicing rights did not experience a decline in value as the impact of lower swap and government-sponsored enterprise (“GSE”) rates were offset by significant spread widening in our predominantly non-GSE servicing portfolio. As a result, our mortgage servicing division recorded net earnings of $85.3 million, or an 85% ROE, despite a $2.3 million net loss from its servicing retention channel.

Operating Expenses

Total operating expenses of $269.7 million for the third quarter of 2007 were up 20% over the second quarter of 2007 and 33% from the same quarter a year ago. Operating expense growth in the third quarter of 2007 from the same period a year ago was driven mainly by the approximately $28 million in severance-related charges that were recorded this quarter as a result of the right-sizing of our workforce. We have executed on plans to reduce our workforce by roughly 1,500 positions, or 15%, through both the voluntary resignation with severance program and targeted involuntary layoffs for regular employees and reductions in our offshore and temporary workforce. In addition, we continued our investments in two of our new business activities, our retail channel and commercial mortgage division, with the bulk of the increase coming from the April 1, 2007 acquisition of the retail lending platform of the New York Mortgage Company (“NYMC”), including roughly 400 employees, and the hiring of over 1,400 retail lending professionals who were former employees of failed mortgage companies such as American Home Mortgage Investment Corp. (“AHM”). As a result, expenses increased by $20.7 million and $5.3 million from the third quarter of 2006 and second quarter of 2007, respectively. In addition, real estate owned (“REO”) related expenses significantly increased to $10.6 million in the third quarter of 2007 from $0.6 million in the same period last year. This is primarily driven by $7.9 million of further write-downs on REOs resulting from a further decline in their values.

Other Items

We also recognized a one-time gain of $24.0 million on the sale and leaseback of one of our properties in Pasadena, California. This gain is reflected in fee and other income in the consolidated statements of operations. Our total gain was $60 million with the remaining $36 million to be recognized over the lease term.

Nine Months ended September 30, 2007 Compared to Nine Months ended September 30, 2006

The Company recorded a net loss of $105.7 million, or $1.46 loss per diluted share, for the nine months ended September 30, 2007. These represent decreases of 139% and 138% in net earnings and earnings per diluted share, respectively, compared with net earnings of $270.7 million, or $3.87 per diluted share, for the nine months ended September 30, 2006. The decline in profitability is mainly attributable to higher credit costs and significant reduction in gain on sale of loans due to spread widening and illiquidity in the secondary mortgage market.

While total SFR mortgage loan production remained relatively flat at $64.9 billion and loan sales grew 4% to $57.7 billion during the first nine months of 2007 compared to the first nine months of 2006, net revenues declined 46% to $557.5 million during the same period. This is primarily due to the decline in MBR margin caused by the secondary market disruption discussed earlier and higher credit costs due to worsening delinquencies in our HFS, HFI and credit risk securities portfolios. The change in product mix of loans sold also contributed to the decline in MBR margin.

As discussed earlier, credit costs during the first nine months of 2007 increased significantly due primarily to worsened delinquency and foreclosure rates in both our HFS and HFI portfolios. For the HFI portfolio, we increased the provision for loan losses to $126.2 million for the nine months ended September 30, 2007 compared to $11.0 million in the nine months ended September 30, 2006. We repurchased $562 million of loans in the first nine months of 2007, mainly due to early payment defaults, compared to $119 million in the first nine months of 2006. Accordingly, we recorded a provision for the secondary market reserve of $87.9 million for the nine months ended September 30, 2007, compared to $24.1 million for the same period last year.

Total non-interest income, excluding gain on sale of loans, increased 105% from $141.1 million for the first nine months of 2006 to $289.7 million for the first nine months of 2007. This increase is largely due to the strong performance from our mortgage servicing division. Service fee income increased $268.5 million, as a direct result of out performance in hedging, as well as, the growth in our servicing portfolio and slower prepayment rates. Revenue from our MBS portfolio declined from $24.6 million for the first nine months of 2006 to a loss of $145.4 million for the first nine months of 2007, primarily due to valuation adjustments on non-investment grade and residual securities, which reflected expected credit losses. Lastly, we recorded a one-time gain of $24.0 million on the sale and leaseback of one of our properties as discussed earlier.

Operating expenses increased 23% from $578.1 million for the first nine months of 2006 to $709.5 million for the first nine months of 2007. The increase is primarily reflected in the 21% growth of our average FTEs from 7,755 for the first nine months of 2006 to 9,359 for the first nine months of 2007, which was necessary to support the expansion of our retail lending group and growth in loan servicing and default management functions. We recorded severance charges of approximately $28 million in the third quarter related to the right-sizing of our workforce. This was partially offset by a one-time expense reduction of $10.3 million related to the curtailment of our pension plan in the second quarter of 2007. Without the two unusual items, the expense growth year over year was 20%. While year-over-year servicing portfolio and total assets have grown by 40% and 24%, respectively, we have been able to hold the growth in ongoing operating expenses to 20% through our previously disclosed cost saving initiatives. We expect to continue to see the benefit of these initiatives, including the right-sizing of our workforce, in the future.

SUMMARY OF BUSINESS SEGMENT RESULTS

Indymac’s hybrid business model combines elements of mortgage banking and thrift investing. Mortgage banking involves the origination, securitization and sale of mortgage loans and related assets, and the servicing of those loans. The revenues from mortgage banking consist primarily of gains on the sale of loans, fees earned from origination, interest income earned while the loans are held for sale and servicing fees. On the thrift side, we generate core spread income from our investment portfolio of prime single-family residential (“SFR”) mortgage loans, home equity loans, consumer and builder construction loans and mortgage-backed securities (“MBS”).

As a result of the asset turn times associated with mortgage banking, it is less capital intensive than thrift investing and generally offers higher returns on invested capital. When demand for mortgages and related secondary products is high, more capital can be deployed in this segment. Thrift investing requires more capital than mortgage banking and generates correspondingly lower returns on invested capital. However, the returns generally tend to be more stable and less cyclical than those from mortgage banking. We allocate more capital to the thrift segment when we believe the secondary market is under-valuing returns on mortgage-related assets. The ability to deploy capital into the segment with the best opportunities at any given time allows us to focus on strong shareholder returns throughout the interest rate cycle.

We have developed a detailed reporting process that computes net earnings and ROE for our key business segments each reporting period and uses the results to evaluate our managers’ performance and determine their incentive compensation. In addition, we use the results to evaluate the performance and prospects of our divisions and adjust our capital allocations to those divisions that earn the best returns for our shareholders.

We predominantly use Generally Accepted Accounting Principles (“GAAP”) to compute each division’s financial results as if it were a stand-alone entity. Consistent with this approach, borrowed funds and their interest cost are allocated based on the funds actually used by the Company to fund the division’s assets and capital is allocated based on regulatory capital rules for the specific assets of each segment. Additionally, transactions between divisions are reflected at arms-length in these financial results and intercompany profits are eliminated in consolidation. We do not allocate fixed corporate and business unit overhead costs to our profit center divisions, because the methodologies to do so are arbitrary and distort each division’s marginal contribution to our profits. However, the cost of these overhead activities is included in the following tables to reconcile to our consolidated results, and is tracked closely, so the responsible managers can be held accountable for the level of these costs and their efficient use.

Our segment reporting is organized consistent with our hybrid business model that combines mortgage banking and thrift investing. The activities of the mortgage banking segment involve the origination, securitization and sale of mortgage loans and related assets, and the servicing of those loans. The revenues from mortgage banking consist primarily of gains on the sale of the loans, fees earned from origination, net interest income earned while the loans are held pending sale, and servicing fees. In the thrift segment, we primarily generate core spread income from our investment portfolio of mortgage-backed securities, prime SFR mortgages, home equity loans, and consumer and builder construction loans.

The following tables and discussion explain the recent results of our two major operating segments, mortgage banking and thrift. These activities, combined with the eliminations and other category, which includes supporting deposit and treasury costs as well as eliminating entries, form our total operating results. Our unallocated corporate overhead costs are also presented and discussed. We have also included supplemental tables showing detailed division level financial results for each of our segments.

The following tables summarize the Company’s financial results by segment for the periods indicated (dollars in thousands):


	Mortgage									Total
	Banking			Thrift			Eliminations			Operating			Corporate			Total
	Segment			Segment			& Other(1)			Results			Overhead			Company

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	39,226		$	73,829		$	29,900		$	142,955		$	(777	)	$	142,178
Provision for loan losses		—			(98,279	)		—			(98,279	)		—			(98,279	)
Gain (loss) on sale of loans		(157,670	)		(35,783	)		(57,666	)		(251,119	)		—			(251,119	)
Service fee income (expense)		183,273			1,571			28,085			212,929			—			212,929
Gain on sale and leaseback of building		—			—			—			—			23,982			23,982
Gain (loss) on MBS		(3,321	)		(91,617	)		1,269			(93,669	)		—			(93,669	)
Other income (expense)		11,737			8,735			898			21,370			222			21,592

Net revenues (expense)		73,245			(141,544	)		2,486			(65,813	)		23,427			(42,386	)
Operating expenses		214,516			34,250			17,345			266,111			39,111			305,222
Severance charges		—			—			—			—			27,634			27,634
Deferral of expenses under SFAS 91		(58,379	)		(4,349	)		—			(62,728	)		—			(62,728	)

Pre-tax earnings (loss)		(82,892	)		(171,445	)		(14,859	)		(269,196	)		(43,318	)		(312,514	)
Minority interests		—			—			—			—			12,396			12,396

Net earnings (loss)	$	(50,512	)	$	(104,411	)	$	(9,017	)	$	(163,940	)	$	(38,777	)	$	(202,717	)

Performance Data
Average interest-earning assets	$	14,591,406		$	16,618,394		$	(94,598	)	$	31,115,202		$	579,356		$	31,694,558
Allocated capital		1,157,664			914,473			11,335			2,083,472			(29,091	)		2,054,381
Loans produced		16,176,966			884,732			N/A			17,061,698			—			17,061,698
Loans sold		13,827,123			826,566			(1,645,142	)		13,008,547			—			13,008,547
MBR margin		(0.77	)%		(4.33	)%		N/A			N/A			N/A			(1.54	)%
ROE		(17	)%		(45	)%		N/A			(31	)%		N/A			(39	)%
Net interest margin		N/A			1.76	%		N/A			1.82	%		N/A			1.78	%
Net interest margin, thrift		N/A			1.76	%		N/A			N/A			N/A			2.37	%
Average FTE		7,734			660			339			8,733			1,157			9,890
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	37,707		$	79,043		$	22,034		$	138,784		$	(2,073	)	$	136,711
Provision for loan losses		—			(4,988	)		—			(4,988	)		—			(4,988	)
Gain (loss) on sale of loans		166,663			16,558			(22,996	)		160,225			—			160,225
Service fee income (expense)		29,927			(397	)		(8,472	)		21,058			—			21,058
Gain (loss) on MBS		15,622			1,976			1,370			18,968			—			18,968
Other income (expense)		2,802			10,631			(610	)		12,823			777			13,600

Net revenues (expense)		252,721			102,823			(8,674	)		346,870			(1,296	)		345,574
Operating expenses		182,026			31,757			12,937			226,720			42,606			269,326
Deferral of expenses under SFAS 91		(60,988	)		(4,492	)		(718	)		(66,198	)		—			(66,198	)

Pre-tax earnings (loss)		131,683			75,558			(20,893	)		186,348			(43,902	)		142,446

Net earnings (loss)	$	80,041		$	46,016		$	(13,141	)	$	112,916		$	(26,736	)	$	86,180

Performance Data
Average interest-earning assets	$	9,798,354		$	15,500,071		$	(93,621	)	$	25,204,804		$	302,213		$	25,507,017
Allocated capital		789,277			820,043			1,939			1,611,259			260,120			1,871,379
Loans produced		23,167,283			1,271,893			—			24,439,176			—			24,439,176
Loans sold		21,216,331			1,281,971			(2,990,126	)		19,508,176			—			19,508,176
MBR margin		0.98	%		1.29	%		N/A			N/A			N/A			1.03	%
ROE		40	%		22	%		N/A			28			N/A			18	%
Net interest margin		N/A			2.02	%		N/A			2.18			N/A			2.13	%
Net interest margin, thrift		N/A			2.02	%		N/A			N/A			N/A			2.50	%
Average FTE		5,902			657			324			6,883			1,303			8,186
Quarter to Quarter Comparison
% change in net earnings		(163	)%		(327	)%		31	%		(245	)%		(45	)%		(335	)%
% change in capital		47	%		12	%		485	%		29	%		(111	)%		10	%


(1)		Included are eliminations, deposits, and treasury items, the details of which are provided on page 31.

MORTGAGE BANKING SEGMENT

Our mortgage banking segment primarily consists of the mortgage production divisions and the mortgage servicing division, which services the loans that Indymac originates, whether they have been sold into the secondary market or are held for investment on our balance sheet.

The mortgage banking segment reported an after-tax loss of $50.5 million in the third quarter of 2007 compared with net earnings of $80.0 million in the same period last year. These lower results were caused by a large decline in earnings from our production divisions, which reported a $123.6 million after-tax loss this quarter, partially offset by very strong returns and growth in the mortgage servicing area.

The primary driver of the loss in the mortgage production divisions this quarter was the decline in the MBR margin from a positive 0.97% of loans sold in last year’s third quarter to a negative 0.83% of loans sold in this year’s third quarter. A large increase in production credit costs was the primary cause of this decline. Mortgage banking revenue was reduced by $226.0 million in pre-tax credit related costs this quarter representing a $209.8 million increase from $16.2 million in the third quarter of 2006. As credit conditions in the U.S. mortgage market have deteriorated, our loan production credit costs have increased. However, we have identified the products where these losses were concentrated and stopped offering them. As a result, substantially all of the production credit losses we incurred this quarter resulted from products we no longer offer.

In addition to the increased credit losses, a severe disruption in the secondary market for loans and securities not sold to the GSEs reduced the value of our loans held for sale. As a result, we recognized $167.2 million less in gain on sale and MBS securities revenue than we expected.

The mortgage banking segment was also negatively impacted this quarter by the fact that it includes two start-up businesses; the retail lending channel and commercial mortgage banking that are currently unprofitable. These two businesses reported a combined after-tax loss of $11.5 million this quarter. We expect these businesses to contribute to mortgage banking profits next year.

Although worsening credit conditions and disrupted secondary markets were significant negatives for our production results this quarter, they improved the performance of our mortgage servicing division. These trends resulted in higher non-GSE mortgage rates, significantly more restrictive underwriting guidelines and declining home prices, all of which worked to slow prepayments in our servicing portfolio. The loans in our servicing portfolio prepaid at an annual rate of 12% in the third quarter of this year compared with 18% in last year’s third quarter. The expectation of slower non-GSE prepayments offset the impact of lower market interest rates and resulted in strong hedging results. As a result, the net income from our mortgage servicing division increased 325% from $20.1 million in the third quarter of 2006 to $85.3 million in this year’s quarter and resulted in an 85% return on the almost $400 million of capital we have invested in this division.

The following tables provide additional detail on total mortgage banking segment for the periods indicated (dollars in thousands):


							Consumer			Commercial			Total
	Mortgage			Mortgage			Mortgage			Mortgage			Mortgage
	Production			Servicing			Banking			Banking			Banking
	Divisions			Division			O/H(1)			Division			Segment

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	50,572		$	(12,080	)	$	632		$	102		$	39,124
Provision for loan losses		—			—			—			—			—
Gain (loss) on sale of loans		(159,817	)		2,543			(193	)		(203	)		(157,467	)
Service fee income (expense)		11,753			171,508			9			3			183,273
Gain (loss) on MBS		—			(3,321	)		—			—			(3,321	)
Other income (expense)		7,014			3,778			755			190			11,737

Net revenues (expense)		(90,478	)		162,428			1,203			92			73,245
Operating expenses		167,064			25,824			18,954			2,674			214,516
Deferral of expenses under SFAS 91		(54,672	)		(3,421	)		—			(286	)		(58,379	)

Pre-tax earnings (loss)		(202,870	)		140,025			(17,751	)		(2,296	)		(82,892	)

Net earnings (loss)	$	(123,579	)	$	85,275		$	(10,810	)	$	(1,398	)	$	(50,512	)

Performance Data
Average interest-earning assets	$	13,040,013		$	1,484,197		$	2,109		$	65,087		$	14,591,406
Allocated capital		735,561			399,237			17,315			5,551			1,157,664
Loans produced		15,000,286			1,051,464			N/A			125,216			16,176,966
Loans sold		13,112,054			674,074			N/A			40,995			13,827,123
MBR margin		(0.83	)%		0.38	%		N/A			N/A			(0.77	)%
ROE		(67	)%		85	%		N/A			(100	)%		(17	)%
Net interest margin		1.54	%		N/A			N/A			0.62	%		N/A
Average FTE		5,839			296			1,549			50			7,734
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	41,218		$	(3,323	)	$	(188	)	$	—		$	37,707
Provision for loan losses		—			—			—			—			—
Gain (loss) on sale of loans		157,271			9,392			—			—			166,663
Service fee income (expense)		5,599			24,328			—			—			29,927
Gain (loss) on MBS		—			15,622			—			—			15,622
Other income (expense)		303			1,653			846			—			2,802

Net revenues (expense)		204,391			47,672			658			—			252,721
Operating expenses		149,728			16,868			15,367			63			182,026
Deferral of expenses under SFAS 91		(58,860	)		(2,128	)		—			—			(60,988	)

Pre-tax earnings (loss)		113,523			32,932			(14,709	)		(63	)		131,683

Net earnings (loss)	$	68,981		$	20,056		$	(8,958	)	$	(38	)	$	80,041

Performance Data
Average interest-earning assets	$	9,152,748		$	645,565		$	41		$	—		$	9,798,354
Allocated capital		509,136			269,464			10,677			—			789,277
Loans produced		22,446,264			721,019			—			—			23,167,283
Loans sold		20,562,308			654,023			—			—			21,216,331
MBR margin		0.97	%		1.44	%		N/A			N/A			0.98	%
ROE		54	%		30	%		N/A			N/A			40	%
Net interest margin		1.79	%		N/A			N/A			N/A			N/A
Average FTE		4,652			175			1,074			1			5,902
Quarter to Quarter Comparison
% change in net earnings		(279	)%		325	%		(21	)%		N/A			(163	)%
% change in equity		44	%		48	%		62	%		N/A			47	%


(1)		Included production division overhead, servicing overhead and secondary marketing overhead of $4.2 million, $3.7 million and $2.9 million, respectively, for the third quarter of 2007. For the third quarter of 2006, the production division overhead, servicing overhead and secondary marketing overhead were $3.8 million, $2.7 million and $2.5 million, respectively.

MORTGAGE PRODUCTION DIVISIONS

The mortgage production divisions originate loans through three divisions: consumer direct, mortgage professionals group (“MPG”) and Financial Freedom. The MPG sources loans through relationships with mortgage brokers, financial institutions, realtors, and homebuilders and is composed of four business unit channels: retail, wholesale, correspondent and conduit.

The consumer direct division offers mortgage loans directly to consumers via our southern California retail branch network and our centralized call center, sourcing leads through direct mail, internet lead aggregators, online advertising and referral programs.

Within the MPG, the retail channel provides mortgage financing directly to home purchase oriented consumers by targeting Realtors^®, homebuilders and financial professionals via storefront mortgage loan offices. With the goal of becoming a top 15 retail lender over the next five years, our recent acquisition of the retail platform of NYMC and the hiring of retail lending professionals from failed mortgage companies provide a model for this channel. As of September 30, 2007, we have 170 retail storefront mortgage offices/branches. This increase was mostly facilitated through a licensing agreement with AHM. Wholesale is the largest channel in our MPG, funding loans originated through mortgage brokers and emerging mortgage bankers nationwide. The correspondent channel purchases closed loans — those already funded — on a flow basis from mortgage brokers, realtors, homebuilders, mortgage bankers and financial institutions. The conduit channel opportunistically purchases pools of closed loans for portfolio, resale, or securitization and this channel is characterized by its low cost operations and quick asset turn times. Currently, we have elected not to use our conduit channel to source loans as a response to the present market condition.

The Financial Freedom division provides reverse mortgage products directly to seniors (age 62 and older) and through mortgage brokers and bankers. Financial Freedom also retains MSRs and receives fees an ancillary revenues for servicing loans sold into the secondary market.

The following tables provide details on the results for the mortgage production divisions of our mortgage banking segment for the periods indicated (dollars in thousands):


				Mortgage Professionals Group Division
																Total Mortgage						Total
	Consumer															Professionals			Financial			Mortgage
	Direct			Retail			Wholesale			Correspondent			Conduit			Group			Freedom			Production
	Division			Channel			Channel			Channel			Channel			Division			Division			Divisions

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	291		$	1,508		$	26,008		$	5,666		$	12,455		$	45,637		$	4,644		$	50,572
Provision for loan losses		—			—			—			—			—			—			—			—
Gain (loss) on sale of loans		2,125			(568	)		(53,466	)		(23,261	)		(98,961	)		(176,256	)		14,314			(159,817	)
Service fee income (expense)		—			—			—			—			—			—			11,753			11,753
Gain (loss) on MBS		—			—			—			—			—			—			—			—
Other income (expense)		173			1,654			5,240			—			(64	)		6,830			11			7,014

Net revenues (expense)		2,589			2,594			(22,218	)		(17,595	)		(86,570	)		(123,789	)		30,722			(90,478	)
Operating expenses		5,369			31,448			78,111			9,672			10,235			129,466			32,229			167,064
Deferral of expenses under SFAS 91		(2,514	)		(12,223	)		(29,689	)		(4,032	)		—			(45,944	)		(6,214	)		(54,672	)

Pre-tax earnings (loss)		(266	)		(16,631	)		(70,640	)		(23,235	)		(96,805	)		(207,311	)		4,707			(202,870	)

Net earnings (loss)	$	(163	)	$	(10,128	)	$	(43,020	)	$	(14,150	)	$	(58,954	)	$	(126,252	)	$	2,836		$	(123,579	)

Performance Data
Average interest-earning assets	$	118,896		$	205,379		$	5,601,759		$	1,257,571		$	4,893,561		$	11,958,270		$	962,847		$	13,040,013
Allocated capital		6,053			17,939			275,232			64,199			236,397			593,767			135,741			735,561
Loans produced		263,259			546,260			8,828,707			1,891,435			2,391,033			13,657,435			1,079,592			15,000,286
Loans sold		238,189			400,705			7,770,432			1,722,851			2,862,416			12,756,404			117,461			13,112,054
MBR margin		1.01	%		0.23	%		(0.35	)%		(1.02	)%		(3.02	)%		(1.02	)%		16.14	%		(0.83	)%
ROE		(11	)%		(224	)%		(62	)%		(87	)%		(99	)%		(84	)%		8	%		(67	)%
Net interest margin		0.97	%		2.91	%		1.84	%		1.79	%		1.01	%		1.51	%		1.91	%		1.54	%
Average FTE		280			1,282			2,571			232			132			4,217			1,342			5,839
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	504		$	3		$	15,939		$	3,577		$	18,327		$	37,846		$	2,868		$	41,218
Provision for loan losses		—			—			—			—			—			—			—			—
Gain (loss) on sale of loans		5,957			48			79,916			7,897			17,905			105,766			45,548			157,271
Service fee income (expense)		—			—			—			—			—			—			5,599			5,599
Gain (loss) on MBS		—			—			—			—			—			—			—			—
Other income (expense)		240			29			—			—			(153	)		(124	)		187			303

Net revenues (expense)		6,701			80			95,855			11,474			36,079			143,488			54,202			204,391
Operating expenses		10,961			868			83,575			11,962			7,557			103,962			34,805			149,728
Deferral of expenses under SFAS 91		(5,197	)		(22	)		(40,282	)		(5,767	)		—			(46,071	)		(7,592	)		(58,860	)

Pre-tax earnings (loss)		937			(766	)		52,562			5,279			28,522			85,597			26,989			113,523

Net earnings (loss)	$	570		$	(466	)	$	32,010		$	3,215		$	17,370		$	52,129		$	16,282		$	68,981

Performance Data
Average interest-earning assets	$	174,893		$	1,339		$	3,734,539		$	830,710		$	3,609,638		$	8,176,226		$	801,629		$	9,152,748
Allocated capital		8,755			67			192,689			42,780			149,894			385,430			114,951			509,136
Loans produced		447,753			7,890			9,280,817			2,503,012			9,078,589			20,870,308			1,128,203			22,446,264
Loans sold		448,113			5,947			9,050,759			2,385,091			7,600,746			19,042,543			1,071,652			20,562,308
MBR margin		1.44	%		0.86	%		1.06	%		0.48	%		0.48	%		0.75	%		4.52	%		0.97	%
ROE		26	%		N/M			66	%		30	%		46	%		54	%		56	%		54	%
Net interest margin		1.14	%		0.89	%		1.69	%		1.71	%		2.01	%		1.84	%		1.42	%		1.79	%
Average FTE		362			25			2,507			246			147			2,925			1,365			4,652
Quarter to Quarter Comparison
% change in net earnings		(129	)%		N/M			(234	)%		N/M			(439	)%		(342	)%		(83	)%		(279	)%
% change in capital		(31	)%		N/M			43	%		50	%		58	%		54	%		18	%		44	%


(1)		MBR margin is calculated using the sum of consolidated gain (loss) on sale of loans and the net interest income earned on HFS loans by our mortgage banking production divisions divided to total loans sold. The gain (loss) on sale of loans includes fair value adjustments on HFS loans in our portfolio at the end of the period that are not included in the amount of total loans sold.

The following table summarizes the key production drivers for the wholesale and correspondent channels for the periods indicated:


	Three Months Ended
	September 30,		September 30,		Percent			June 30,		Percent
	2007		2006		Change			2007		Change

Key Production Drivers:
Active customers(1)		9,223		7,686		20	%		9,187		—
Sales personnel		1,235		992		24	%		1,241		—
Number of regional offices		16		16		—			16		—


(1)		Active customers are defined as customers who funded at least one loan during the most recent90-day period.

Loan Production

Loan production and sales are the profitability drivers of our mortgage banking segment. While the table on page 15 presents only the results of the mortgage production divisions of our mortgage banking segment, which contribute 95% to our total loan originations, the following discussion refers to total Company production, through both the mortgage banking and thrift segments.

We generated SFR mortgage loan production of $16.8 billion for the third quarter of 2007, down 30% and 25% from the third quarter of 2006 and second quarter of 2007, respectively. Total loan production, including commercial real estate loans and builder financings, reached $17.1 billion for the third quarter of 2007, compared to $24.4 billion a year ago. At September 30, 2007, our total pipeline of SFR mortgage loans in process was $7.4 billion, down 49% and 45% from September 30, 2006 and June 30, 2007, respectively. On October 17, 2007, the MBA issued an estimate of the industry volume for the third quarter of 2007 of $550 billion, which represents a 21% drop from both the second quarter of 2007 and third quarter of 2006. Based on this estimate, our market share is 3.06% for the quarter ended September 30, 2007, down from 3.44% and 3.24% in the quarters ended September 30, 2006 and June 30, 2007, respectively.

The decline in our SFR mortgage production in the third quarter of 2007 was mainly attributable to a significant decline in our conduit business as we elected not to use this channel to source loans at this time. Excluding production from the conduit channel, total SFR production declined 3% for the third quarter year over year. MPG’s retail channel generated $546 million in production for the third quarter of 2007. The Financial Freedom division saw a 4% decline in its reverse mortgage production from the third quarter of 2006, and was down 14% from the second quarter of 2007 as competition intensified in the reverse mortgage market. Our commercial mortgage banking division, which began operations in March 2007, generated $125 million of commercial real estate loans, while our homebuilder division saw a 74% decline in volume to $121 million for the third quarter of 2007.

The following summarizes our loan production by division and channel for the periods indicated (dollars in millions):


	Three Months Ended												Nine Months Ended
	September 30,		September 30,		Percent			June 30,		Percent			September 30,		September 30,		Percent
	2007		2006		Change			2007		Change			2007		2006		Change

Production by Division and Channel:
SFR mortgage loan production:
Mortgage professionals group division:
Wholesale channel(1)	$	8,829	$	9,281		(5	)%	$	10,238		(14	)%	$	29,699	$	26,887		10	%
Correspondent channel		1,891		2,503		(24	)%		2,649		(29	)%		7,564		7,307		4	%
Conduit channel		2,391		9,078		(74	)%		5,281		(55	)%		16,040		20,685		(22	)%
Retail channel		546		—		N/A			376		45	%		971		—		N/A
Consumer direct division		263		456		(42	)%		289		(9	)%		872		1,533		(43	)%
Financial Freedom division		1,080		1,128		(4	)%		1,258		(14	)%		3,559		3,583		(1	)%
Servicing retention channel		1,052		721		46	%		1,490		(29	)%		3,660		1,688		117	%
Home equity division(2)		4		30		(87	)%		7		(43	)%		36		93		(61	)%
Consumer construction division(2)		760		771		(1	)%		917		(17	)%		2,489		2,229		12	%

Total SFR mortgage loan production		16,816		23,968		(30	)%		22,505		(25	)%		64,890		64,005		1	%
Commercial loan production:
Commercial mortgage banking division		125		—		N/A			45		178	%		171		—		N/A
Homebuilder division(2)		121		471		(74	)%		473		(74	)%		954		1,365		(30	)%

Total loan production	$	17,062	$	24,439		(30	)%	$	23,023		(26	)%	$	66,015	$	65,370		1	%

Total pipeline of SFR mortgage loans in process at period end	$	7,421	$	14,556		(49	)%	$	13,376		(45	)%


(1)		Wholesale channel includes $1.4 billion, $898 million, and $1.4 billion of production from wholesale inside sales for the quarters ended September 30, 2007 and 2006 and June 30, 2007, respectively, and $4.1 billion, and $2.2 billion of production from wholesale inside sales for the nine months ended September 30, 2007 and 2006, respectively. The wholesale inside sales force focuses on small and geographically remote mortgage brokers through centralized in-house sales personnel instead of field sales personnel.

(2)		The amounts of home equity lines of credit (“HELOCs”), consumer construction loans and builder construction loans originated by these channels represent commitments.

The following summarizes our loan production by product type for the periods indicated (dollars in millions):


	Three Months Ended															Nine Months Ended
	September 30,			September 30,			Percent			June 30,			Percent			September 30,			September 30,			Percent
	2007			2006			Change			2007			Change			2007			2006			Change

Production by Product Type:
Standard first mortgage products:
Prime	$	13,632		$	19,363			(30	)%	$	18,536			(26	)%	$	52,887		$	50,425			5	%
Subprime		596			729			(18	)%		751			(21	)%		2,431			1,788			36	%

Total standard first mortgage products (S&P evaluated)		14,228			20,092			(29	)%		19,287			(26	)%		55,318			52,213			6	%
Specialty consumer home mortgage products:
HELOCs(1)/Seconds		637			1,840			(65	)%		876			(27	)%		3,216			5,343			(40	)%
Reverse mortgages		1,080			1,128			(4	)%		1,258			(14	)%		3,559			3,583			(1	)%
Consumer construction(1)		871			908			(4	)%		1,084			(20	)%		2,797			2,866			(2	)%

Subtotal SFR mortgage production		16,816			23,968			(30	)%		22,505			(25	)%		64,890			64,005			1	%
Commercial loan products:
Commercial real estate		125			—			N/A			45			178	%		171			—			N/A
Builder construction commitments(1)		121			471			(74	)%		473			(74	)%		954			1,365			(30	)%

Total production	$	17,062		$	24,439			(30	)%	$	23,023			(26	)%	$	66,015		$	65,370			1	%

Total S&P lifetime loss estimate(2)		0.49	%		0.87	%					0.63	%					0.68	%		0.81	%


(1)		Amounts represent total commitments.

(2)		While our production is evaluated using the Standard & Poor’s (“S&P”) Levels model, the data are not audited or endorsed by S&P. S&P evaluated production excludes second liens, HELOCs, reverse mortgages, and construction loans.

The above loan production by product type provides a breakdown of standard first mortgage products by prime and subprime only. As the definition of various product types tends to vary widely in the mortgage industry, we believe that further classification may not accurately reflect the credit quality of loans produced implied through such classification.

Loan Sale and Distribution

The following table shows the various channels through which loans were distributed for the Company during the periods indicated (dollars in millions):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

Distribution of Loans by Channel:
Sales of GSE equivalent loans		64	%		16	%		40	%		41	%		18	%
Private-label securitizations		31	%		38	%		46	%		36	%		40	%
Whole loan sales, servicing retained		—			38	%		13	%		20	%		36	%
Whole loan sales, servicing released		1	%		1	%		—			1	%		2	%

Subtotal sales		96	%		93	%		99	%		98	%		96	%
Investment portfolio acquisitions		4	%		7	%		1	%		2	%		4	%

Total loan distribution percentage		100	%		100	%		100	%		100	%		100	%

Total loan distribution	$	13,478		$	20,914		$	20,378		$	58,789		$	57,870

Due to the disruptions in the secondary mortgage market, we have tightened our guidelines and focused on GSE eligible mortgage products. As a result, sales to GSEs increased to 64% of total loan distribution for the third quarter of 2007, up significantly from 16% and 40% for the third quarter of 2006 and second quarter of 2007, respectively. We expect that a very high percentage of our loan sales will be to the GSEs until the private MBS market recovers.

In conjunction with the sale of mortgage loans, we generally retain certain assets. The primary assets retained include MSRs and, to a lesser degree, AAA-rated and agency interest-only securities, AAA-rated principal-only securities, prepayment penalty securities, late fee securities, investment and non-investment grade securities, and residual securities. The allocated cost of the retained assets at the time of sale is recorded as an asset with an offsetting increase to the gain on sale of loans (or a reduction in the cost basis of the loans sold). The calculation of gain (loss) on sales of loans included the retention of $194.0 million of MSRs and $174.1 million of other retained assets, consisting of investment-grade securities of $151.0 million and non-investment grade and residual securities of $23.1 million during the three months ended September 30, 2007. During the three months ended September 30, 2007, assets previously retained generated cash flows of $217.9 million. More information on the valuation assumptions related to our retained assets can be found in table 14 “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” on page 70.

The profitability of our loans is measured by the MBR margin, which is calculated using mortgage banking revenue divided by total loans sold. MBR includes total consolidated gain (loss) on sale of loans and the net interest income earned on mortgage loans held for sale by mortgage banking production divisions. Most of the gain (loss) on sale of loans resulted from the loan sale activities in our mortgage banking segment. The gain (loss) on sale recognized in the thrift segment, primarily lot loans and home equity products, is included in the MBR margin calculation.

The following table summarizes the amount of loans sold and the MBR margin during the periods indicated (dollars in millions):


	Three Months Ended															Nine Months Ended
	September 30,			September 30,			Percent			June 30,			Percent			September 30,			September 30,			Percent
	2007			2006			Change			2007			Change			2007			2006			Change

Total loans sold	$	13,009		$	19,508			(33	)%	$	20,194			(36	)%	$	57,739		$	55,632			4	%
MBR margin after production hedging		0.48	%		1.32	%		(64	)%		1.31	%		(63	)%		1.04	%		1.47	%		(29	)%
MBR margin after credit costs		(1.26	)%		1.24	%		(202	)%		1.01	%		(225	)%		0.44	%		1.35	%		(67	)%
Net MBR margin		(1.54	)%		1.03	%		(250	)%		0.80	%		(293	)%		0.22	%		1.12	%		(80	)%

For more details on our MBR margin see Table 7 on page 64 of our Appendix A.

MORTGAGE SERVICING DIVISION

Servicing is a key component of our business model, as it is a natural complement to our mortgage production operations and its financial performance tends to run countercyclical to the mortgage production business. Through MSRs retained from our mortgage banking activities, we collect fees and ancillary revenues for servicing loans sold into the secondary market. As interest rates rise, the expected life of the underlying loans is generally extended, which extends the life of the income stream flowing from those loans. This in turn increases the capitalized value of the associated MSRs. Conversely, as interest rates decline, the value of the MSRs may also decline. To mitigate the potential volatility in the MSRs, we hedge this asset to earn a stable return throughout the interest rate cycle. For more information on servicing hedges, see the “Consolidated Risk Management Discussion” section on page 33.

During the third quarter of 2007, the overall swap and GSE market rates declined, which resulted in gains in value in our hedging instruments. The decline in value of the MSR asset that would be attributed to swap and GSE market rates was entirely offset by reduced expectation of future prepayments from housing turnover and higher non-GSE market rates.

Our servicing portfolio provides opportunities to cross sell other products, such as HELOCs, checking accounts, certificates of deposit, and other deposit services. In a declining interest rate environment, our servicing portfolio provides an existing base of customers who may be in the market to refinance. Capturing or “retaining” these customers helps mitigate the decline in the value of our mortgage servicing asset caused by prepayment of the original loan.

The fair value of our MSRs is determined using discounted cash flow techniques benchmarked against third-party opinions. Estimates of fair value involve several assumptions, including assumptions about future prepayment rates, market expectations of future interest rates cost to service the loans (including default management costs), ancillary incomes, and discount rates. Prepayment speeds are projected using a prepayment model developed by a third-party vendor and calibrated for the Company’s collateral. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the market forward LIBOR/swap curve, as well as collateral specific current coupon information. Refer to table 14 “Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities” on page 70 for further detail on the valuation assumptions.

Total capitalized MSRs reached $2.5 billion as of September 30, 2007, up $858.3 million, or 53%, from $1.6 billion at September 30, 2006 and $667.2 million, or 37%, from $1.8 billion at December 31, 2006.

The following tables provide additional detail on the results for the mortgage servicing division of our mortgage banking segment for the periods indicated (dollars in thousands):


	Mortgage						Total
	Servicing			Servicing			Mortgage
	Rights			Retention			Servicing
	Channel			Channel			Division

Three Months Ended September 30, 2007
Operating Results
Net interest income (expense)	$	(15,042	)	$	2,962		$	(12,080	)
Provision for loan losses		—			—			—
Gain (loss) on sale of loans		279			2,264			2,543
Service fee income (expense)		171,508			—			171,508
Gain (loss) on MBS		(3,321	)		—			(3,321	)
Other income (expense)		2,274			1,504			3,778

Net revenues (expense)		155,698			6,730			162,428
Operating expenses		11,874			13,950			25,824
Deferral of expenses under SFAS 91		—			(3,421	)		(3,421	)

Pre-tax earnings (loss)		143,824			(3,799	)		140,025

Net earnings (loss)	$	87,589		$	(2,314	)	$	85,275

Performance Data
Average interest-earning assets	$	600,337		$	883,860		$	1,484,197
Allocated capital		358,217			41,020			399,237
Loans produced		—			1,051,464			1,051,464
Loans sold		—			674,074			674,074
MBR margin		N/A			0.34	%		0.38	%
ROE		97	%		(22	)%		85	%
Net interest margin		N/A			1.33	%		N/A
Average FTE		89			207			296
Three Months Ended September 30, 2006
Operating Results
Net interest income (expense)	$	(4,600	)	$	1,277		$	(3,323	)
Provision for loan losses		—			—			—
Gain (loss) on sale of loans		1,575			7,817			9,392
Service fee income (expense)		24,328			—			24,328
Gain (loss) on MBS		15,622			—			15,622
Other income (expense)		309			1,344			1,653

Net revenues (expense)		37,234			10,438			47,672
Operating expenses		8,605			8,263			16,868
Deferral of expenses under SFAS 91		—			(2,128	)		(2,128	)

Pre-tax earnings (loss)		28,629			4,303			32,932

Net earnings (loss)	$	17,435		$	2,621		$	20,056

Performance Data
Average interest-earning assets	$	273,277		$	372,288		$	645,565
Allocated capital		252,148			17,316			269,464
Loans produced		—			721,019			721,019
Loans sold		19,249			634,774			654,023
MBR margin		N/A			1.23	%		1.44	%
ROE		27	%		60	%		30	%
Net interest margin		N/A			N/A			N/A
Average FTE		93			82			175
Quarter to Quarter Comparison
% change in net earnings		402	%		(188	)%		325	%
% change in capital		42	%		137	%		48	%

Total loans serviced for others reached $173.9 billion (including reverse mortgages and HELOCs) at September 30, 2007, with a weighted average coupon of 7.04%. In comparison, we serviced $124.4 billion of

mortgage loans owned by others at September 30, 2006, with a weighted average coupon of 6.96%; and $167.7 billion at June 30, 2007, with a weighted average coupon of 7.06%.

The following table provides the activity in the servicing portfolios for the periods indicated (dollars in millions):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

Unpaid principal balance of loans serviced at beginning of period	$	167,710		$	109,989		$	156,144		$	139,817		$	84,495
Additions		13,377			20,709			20,580			58,647			56,822
Clean-up calls exercised		—			—			(153	)		(153	)		(31	)
Loan payments and prepayments		(7,172	)		(6,303	)		(8,861	)		(24,396	)		(16,891	)

Unpaid principal balance of loans serviced at end of period	$	173,915		$	124,395		$	167,710		$	173,915		$	124,395

The following tables also provide additional information related to the servicing portfolio as of the dates indicated:


	September 30,			September 30,			June 30,
	2007			2006			2007

By Product Type:
Fixed-rate mortgages		37	%		34	%		36	%
Intermediate term fixed-rate loans		35	%		29	%		34	%
Pay option adjustable-rate mortgages (“ARMs”)		16	%		25	%		18	%
Reverse mortgages (all ARMs)		9	%		9	%		9	%
HELOCs		2	%		2	%		2	%
Other		1	%		1	%		1	%

Total		100	%		100	%		100	%

Additional Information(1):
Weighted average FICO(2)		705			703			704
Weighted average original loan-to-value (“LTV”) ratio(3)		73	%		73	%		72	%
Average original loan size (in thousands)		243			228			239
Percent of portfolio with prepayment penalty		37	%		42	%		39	%
Portfolio delinquency (% of unpaid principal balance)(4)		6.77	%		4.02	%		5.23	%
By Geographic Distribution:
California		43	%		42	%		43	%
Florida		8	%		8	%		8	%
New York		8	%		8	%		8	%
New Jersey		4	%		4	%		4	%
Virginia		4	%		4	%		4	%
Other		33	%		34	%		33	%

Total		100	%		100	%		100	%


(1)		Portfolio delinquency is calculated for the entire servicing portfolio. All other information presented excludes reverse mortgages.

(2)		FICO scores are the result of a credit scoring system developed by Fair Isaacs and Co. and are generally used by lenders to evaluate a borrower’s credit history. FICO scores of 700 or higher are generally considered in the mortgage industry to be very high quality borrowers with low risk of default, but in general, the secondary market will consider FICO scores of 620 or higher to be prime.

(3)		Combined loan-to-value (“CLTV”) ratio for loans in the second lien position is used to calculate weighted average original LTV ratio for the portfolio.

(4)		Delinquency is defined as 30 days or more past the due date excluding loans in foreclosure.

THRIFT SEGMENT

Our thrift segment invests in loans originated by our various production units as well as in mortgage-backed securities. We manage our investments in the thrift portfolio based on the extent to which (1) the ROEs exceed the cost of both core and risk-based capital, or (2) they are needed to support the core mortgage banking investments in mortgage servicing rights and residual and non-investment grade securities, if the ROEs are below our cost of capital. Additionally, the segment engages in warehouse lending and consumer construction and homebuilder financing. These investing activities provide core spread income and generally, a more stable return on equity.

In addition to the $50.5 million net loss in our mortgage banking segment, our thrift segment reported a $104.4 million net loss in the third quarter of this year that was also caused by a large increase in credit related costs. Credit related costs for the thrift segment are reflected in the provision for loan losses as well as the valuation of our investment grade, non-investment grade and residual securities. Credit costs in the thrift segment for the third quarter of 2007 totaled $181.7 million pre-tax compared with essentially no credit costs in the thrift segment in last year’s third quarter as last year’s provision for loan losses was offset by credit related valuation gain on residual securities. Although all the divisions in the thrift segment incurred higher credit costs this quarter, the majority of the increase was concentrated in the homebuilder and the non-investment grade and residual securities divisions. Included in the total $98.3 million provision for loan losses for this segment was $78.2 million for the homebuilder division reflecting an expectation of increasing non-performing assets from this division as the housing market continues to deteriorate.

The following tables provide detail on the results for divisions of our thrift segment for the periods indicated (dollars in thousands):


				Non-
				Investment			��	Total
	Investment			Grade and				Mortgage-			SFR
	Grade			Residual				Backed			Mortgage			Home			Consumer						Warehouse			Discontinued			Total
	Securities			Securities				Securities			Loans HFI			Equity			Construction			Homebuilder			Lending			Products			Thrift
	Channel			Channel				Division			Division			Division			Division			Division			Division			Division			Segment

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	8,576		$	16,560			$	25,136		$	10,948		$	9,021		$	14,228		$	12,754		$	1,321		$	421		$	73,829
Provision for loan losses		—			—				—			(12,000	)		(800	)		(6,750	)		(78,191	)		(88	)		(450	)		(98,279	)
Gain (loss) on sale of loans		—			—				—			(5,784	)		(37,051	)		7,052			—			—			—			(35,783	)
Service fee income (expense)		—			—				—			—			1,571			—			—			—			—			1,571
Gain (loss) on MBS		(19,213	)		(67,231	)			(86,444	)		—			(4,870	)		(303	)		—			—			—			(91,617	)
Other income (expense)		—			—				—			543			1,606			6,415			(204	)		375			—			8,735

Net revenues (expense)		(10,637	)		(50,671	)			(61,308	)		(6,293	)		(30,523	)		20,642			(65,641	)		1,608			(29	)		(141,544	)
Operating expenses		59			842				901			4,649			3,490			18,755			5,410			980			65			34,250
Deferral of expenses under SFAS 91		—			—				—			—			(43	)		(2,862	)		(1,444	)		—			—			(4,349	)

Pre-tax earnings (loss)		(10,696	)		(51,513	)			(62,209	)		(10,942	)		(33,970	)		4,749			(69,607	)		628			(94	)		(171,445	)

Net earnings (loss)	$	(6,514	)	$	(31,371	)		$	(37,885	)	$	(6,664	)	$	(20,688	)	$	2,892		$	(42,391	)	$	382		$	(57	)	$	(104,411	)

Performance Data
Average interest-earning assets	$	4,602,711		$	403,030			$	5,005,741		$	5,455,887		$	1,706,154		$	2,963,940		$	1,264,835		$	190,996		$	30,841		$	16,618,394
Allocated capital		88,247			229,011				317,258			199,024			124,106			151,704			104,399			15,211			2,771			914,473
Loans produced		—			—				—			—			3,726			759,900			121,106			—			—			884,732
Loans sold		—			—				—			329,996			82,596			413,974			—			—			—			826,566
ROE		(29	)%		(54	)%			(47	)%		(13	)%		(66	)%		8	%		(161	)%		10	%		(8	)%		(45	)%
Net interest margin, thrift.		0.74	%		16.30	%			1.99	%		0.80	%		2.10	%		1.90	%		4.00	%		2.74	%		5.42	%		1.76	%
Efficiency ratio		(1	)%		(2	)%			(1	)%		81	%		(12	)%		58	%		32	%		58	%		15	%		(69	)%
Average FTE		2			9				11			11			75			405			128			30			—			660
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	8,274		$	11,002			$	19,276		$	20,430		$	10,851		$	10,454		$	16,488		$	1,035		$	509		$	79,043
Provision for loan losses		—			—				—			(2,000	)		—			(720	)		(2,200	)		(18	)		(50	)		(4,988	)
Gain (loss) on sale of loans		—			—				—			748			5,788			10,022			—			—			—			16,558
Service fee income (expense)		—			—				—			—			(397	)		—			—			—			—			(397	)
Gain (loss) on MBS		(361	)		5,991				5,630			—			(3,607	)		(47	)		—			—			—			1,976
Other income (expense)		(14	)		—				(14	)		429			2,392			6,655			703			466			—			10,631

Net revenues (expense)		7,899			16,993				24,892			19,607			15,027			26,364			14,991			1,483			459			102,823
Operating expenses		315			658				973			1,365			5,607			17,690			4,911			1,134			77			31,757
Deferral of expenses under SFAS 91		—			—				—			—			(361	)		(2,321	)		(1,810	)		—			—			(4,492	)

Pre-tax earnings (loss)		7,584			16,335				23,919			18,242			9,781			10,995			11,890			349			382			75,558

Net earnings (loss)	$	4,619		$	9,948			$	14,567		$	11,109		$	5,957		$	6,696		$	7,241		$	213		$	233		$	46,016

Performance Data
Average interest-earning assets	$	3,603,050		$	242,911			$	3,845,961		$	5,851,294		$	1,947,724		$	2,568,007		$	1,112,338		$	135,511		$	39,236		$	15,500,071
Allocated capital		70,215			123,494				193,709			220,811			151,013			130,975			108,408			11,583			3,544			820,043
Loans produced		—			—				—			—			29,806			770,937			471,150			—			—			1,271,893
Loans sold		—			—				—			—			635,366			646,605			—			—			—			1,281,971
ROE		26	%		32	%			30	%		20	%		16	%		20	%		26	%		7	%		26	%		22	%
Net interest margin, thrift.		0.91	%		17.97	%			1.99	%		1.39	%		2.21	%		1.62	%		5.88	%		3.03	%		5.15	%		2.02	%
Efficiency ratio		4	%		4	%			4	%		6	%		35	%		57	%		18	%		76	%		15	%		25	%
Average FTE		6			7				13			14			76			416			111			27			—			657
Quarter to Quarter Comparison
% change in net earnings		(241	)%		(415	)%			(360	)%		(160	)%		(447	)%		(57	)%		N/M			79	%		(124	)%		(327	)%
% change in capital		26	%		85	%			64	%		(10	)%		(18	)%		16	%		(4	)%		31	%		(22	)%		12	%

The following tables and discussion present supplemental information to help understand the composition and credit quality of the assets held in our thrift portfolios. This section refers to company-wide assets, a small portion of which may be held in our mortgage banking divisions.

MORTGAGE-BACKED SECURITIES DIVISION

The following table provides the details of the mortgage-backed securities portfolio as of the dates indicated (dollars in thousands):


	September 30, 2007						September 30, 2006						December 31, 2006
	Trading		AFS		Total		Trading		AFS		Total		Trading		AFS		Total

Mortgage Banking Segment:
AAA-rated agency securities	$	350,694	$	—	$	350,694	$	—	$	—	$	—	$	—	$	2,915	$	2,915
AAA-rated and agency interest-only securities		71,901		—		71,901		64,083		—		64,083		66,581		—		66,581
AAA-rated principal-only securities		72,488		—		72,488		35,158		—		35,158		38,478		—		38,478
Prepayment penalty and other securities		83,205		—		83,205		92,326		—		92,326		93,176		—		93,176

Total Mortgage Banking		578,288		—		578,288		191,567		—		191,567		198,235		2,915		201,150

Thrift segment:
AAA-rated non-agency securities		152,773		3,762,877		3,915,650		33,829		4,130,995		4,164,824		43,957		4,604,489		4,648,446
AAA-rated agency securities		45,414		47,408		92,822		—		50,084		50,084		—		62,260		62,260
AAA-rated and agency interest-only securities		—		—		—		4,357		—		4,357		6,989		—		6,989
Prepayment penalty and other securities		5,034		—		5,034		6,096		—		6,096		4,400		—		4,400
Other investment grade securities		255,390		468,766		724,156		29,906		163,289		193,195		29,015		160,238		189,253
Other non-investment grade securities		152,340		37,939		190,279		38,999		39,279		78,278		41,390		38,784		80,174
Non-investment grade residual securities		218,405		7,410		225,815		222,825		38,833		261,658		218,745		31,828		250,573

Total thrift		829,356		4,324,400		5,153,756		336,012		4,422,480		4,758,492		344,496		4,897,599		5,242,095

Total mortgage-backed securities	$	1,407,644	$	4,324,400	$	5,732,044	$	527,579	$	4,422,480	$	4,950,059	$	542,731	$	4,900,514	$	5,443,245

AAA-rated mortgage-backed securities represented 79%, 87% and 89% of the total portfolio at September 30, 2007 and 2006 and December 31, 2006, respectively. These securities had an expected weighted average life of 3.2 years, 2.8 years and 2.9 years at September 30, 2007 and 2006 and December 31, 2006, respectively.

SFR MORTGAGE LOANS HFI DIVISION

The SFR mortgage loans HFI portfolio is comprised primarily of adjustable-rate and intermediate term fixed-rate mortgage loans. We invest in this portfolio depending on external market conditions.

Included in our loans HFI portfolio at September 30, 2007 were $1.1 billion in pay option ARM loans, or 22% of the portfolio, as compared to $1.2 billion, or 18% of the portfolio, at September 30, 2006 and $1.2 billion, or 18% of the portfolio, at December 31, 2006. As of September 30, 2007, approximately 88% (based on loan count) of our pay option ARM loans had negatively amortized, resulting in an increase of $46.5 million to their original loan balance. This is an increase from 80% and 83% at September 30, 2006 and December 31, 2006, respectively. The net increase in unpaid principal balance due to negative amortization was $7.9 million and $19.7 million for the three and nine months ended September 30, 2007, respectively, which approximated the deferred interest recognized for the periods.

The following tables provide a composition of the SFR mortgage loans HFI portfolio and the relevant credit quality characteristics as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Outstanding balance (book value)	$	4,913,471		$	6,462,610		$	6,519,340
Average loan size		344			304			310
Non-performing loans		3.64	%		0.90	%		1.09	%
Estimated average life in years(1)		3.5			2.4			2.6
Estimated average net duration in month(2)		2.2			(1.0	)		(3.5	)
Annualized yield		6.32	%		6.00	%		6.01	%
Percent of loans with active prepayment penalty		34	%		34	%		34	%
Fixed-rate mortgages		6	%		5	%		5	%
Intermediate term fixed-rate loans		16	%		14	%		15	%
Interest-only loans		54	%		61	%		60	%
Pay option ARMs		22	%		18	%		18	%
Other		2	%		2	%		2	%
*Additional Information:*
Average FICO score		712			716			716
Original average LTV ratio		73	%		73	%		73	%
Current average LTV ratio(3)		70	%		59	%		61	%
Geographic distribution of top five states:
Southern California		33	%		32	%		32	%
Northern California		22	%		20	%		20	%

Total California		55	%		52	%		52	%
Florida		6	%		6	%		6	%
New York		5	%		4	%		4	%
Virginia		3	%		3	%		3	%
Arizona		3	%		3	%		3	%
Other		28	%		32	%		32	%

Total		100	%		100	%		100	%


(1)		Represents the estimated length of time, on average, the SFR loan portfolio will remain outstanding based on our estimates for prepayments.

(2)		Average net duration measures the expected change in the value of a financial instrument in response to changes in interest rates, taking into consideration the impact of the related hedges. The negative net duration implies an increase in value as rates rise while the positive net duration implies a decrease in value.

(3)		Current average LTV ratio is estimated based on the Office of Federal Housing Enterprise Oversight House Price Index Metropolitan Statistical Area data for the second quarter of 2007 on a loan level basis.

HOME EQUITY DIVISION

The home equity division specializes in providing HELOC and closed-end second mortgages nationwide through our wholesale and retail channels. At September 30, 2007, our total HELOC servicing portfolio amounted to $4.1 billion, an increase of approximately $515.3 million from the portfolio size at December 31, 2006.

We produced $566.7 million of new HELOC commitments through our mortgage banking segment and internal channels during the third quarter of 2007, but sold none during the period. During the third quarter of 2006, we produced $1.0 billion of HELOC loans and sold $635.4 million with a corresponding gain on sale of $6.8 million.

All HELOC loans are adjustable-rate loans and indexed to the prime rate. Information on the combined HELOC portfolio, including both HFS and HFI loans, is presented as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Outstanding balance (book value)	$	1,509,125		$	765,760		$	656,714
Total commitments(1)		3,149,353			2,115,407			2,211,298
Average spread over prime		1.23	%		1.17	%		1.39	%
Average FICO score		729			736			737
Average CLTV ratio(2)		77	%		77	%		77	%

Additional Information on HELOC Portfolio


			Average Loan					Current		30+ Days
September 30, 2007	Outstanding		Commitment		Average Spread			Average		Delinquency
CLTV Ratio	Balance		Balance		Over Prime			FICO		Percentage(3)

96% to 100%	$	90,729	$	87		2.45	%		698		5.59	%
91% to 95%		285,029		92		1.77	%		716		2.70	%
81% to 90%		521,551		81		1.64	%		711		2.29	%
71% to 80%		340,373		138		0.52	%		737		1.50	%
70% or less		271,443		143		0.37	%		747		0.92	%

Total	$	1,509,125		109		1.23	%		729		2.14	%

September 30, 2006 CLTV Ratio
96% to 100%	$	80,904	$	116		2.05	%		731		3.03	%
91% to 95%		99,220		99		2.10	%		713		0.62	%
81% to 90%		304,942		92		1.48	%		718		0.92	%
71% to 80%		161,165		165		0.35	%		745		0.50	%
70% or less		119,529		158		0.15	%		752		0.83	%

Total	$	765,760		126		1.17	%		736		1.00	%


(1)		On funded loans.

(2)		The CLTV ratio combines the LTV on both the first mortgage loan and the HELOC.

(3)		30+ days delinquency include loans that are 30 days or more past the due date including loans in foreclosure.

CONSUMER CONSTRUCTION DIVISION

Our consumer construction division provides construction financing for individual consumers who want to build a new primary residence or second home. The primary product is a construction-to-permanent residential mortgage loan. This product typically provides financing for a construction term from 6 to 12 months and automatically converts to a permanent mortgage loan at the end of construction. The end result is a loan product that represents a hybrid activity between our portfolio lending and mortgage banking activities. As of September 30, 2007, based on the underlying note agreements, 77% of the construction loans will be converted to adjustable-rate permanent loans, 15% to intermediate term fixed-rate loans, and 8% to fixed-rate loans.

During the third quarter of 2007, we entered into new consumer construction commitments of $0.9 billion, which is a decrease of 20%, or $213 million, from the second quarter of 2007 and a decrease of 4%, or $37 million, from the third quarter of 2006. Approximately 70% of new commitments are generated through mortgage broker customers of the MPG and the remaining 30% of new commitments are retail originations. Once each loan has converted to a permanent mortgage loan, the mortgage is classified as a mortgage loan HFS and may be sold in the secondary market or acquired by our SFR mortgage loan portfolio. The amount of construction loans that were

converted to permanent status was $479 million for the third quarter of 2007, a decrease of 11% over the second quarter of 2007 but an increase of 6% over the third quarter of 2006. Overall, we are one of the largest custom residential construction lenders in the nation. Consumer construction loans outstanding at September 30, 2007 increased 17% from December 31, 2006 and September 30, 2006.

Since the introduction of a monthly adjusting construction period ARM product in the second quarter of 2006, the percentage of adjustable-rate loans in our portfolio has increased to 61% at September 30, 2007 from 20% and 29% at September 30, 2006 and December 31, 2006, respectively. The ratio of non-performing loans increased to 2.02% of the portfolio at September 30, 2007, compared to 0.82% and 1.14% at September 30, 2006 and December 31, 2006, respectively. As a result, we increased the provision for loan losses to $6.8 million for the third quarter of 2007 and increased the percentage of allowance for loan losses to book value to 0.57% at the end of the quarter.

Information on our consumer construction portfolio is presented in the following tables as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Outstanding balance (book value)	$	2,658,292		$	2,271,995		$	2,276,133
Total commitments		4,044,659			3,694,295			3,600,454
Average loan commitment		478			477			474
Non-performing loans		2.02	%		0.82	%		1.14	%
Fixed-rate loans		39	%		80	%		71	%
Adjustable-rate loans		61	%		20	%		29	%
*Additional Information:*
Average LTV ratio(1)		74	%		73	%		73	%
Average FICO score		721			713			718
Geographic distribution of top five states:
Southern California		29	%		28	%		28	%
Northern California		13	%		15	%		15	%

Total California		42	%		43	%		43	%
Florida		7	%		9	%		9	%
Washington		4	%		4	%		4	%
New York		4	%		4	%		4	%
Arizona		4	%		3	%		3	%
Other		39	%		37	%		37	%

Total		100	%		100	%		100	%


(1)		The average LTV ratio is based on the estimated appraised value of the completed project compared to the commitment amount at the date indicated.

HOMEBUILDER DIVISION

The homebuilder division provides land acquisition, development and construction financing to small to mid-sized homebuilders for residential construction. Our typical customer is a mid-size, professional homebuilder who builds between 20 and 2,000 homes per year. We do a limited amount of business with large private and public homebuilders. Builder construction loans are typically adjustable-rate loans, indexed to the prime interest rate with terms ranging from 12 to 24 months. We earn net interest income on these loans. 95% of the loans in this portfolio are secured by corporate or personal guarantees of the builders as well as the underlying real estate. At September 30, 2007, 22% of these loans have balances over $25 million, down from 34% at September 30, 2006. The homebuilder division has central operations in Pasadena, California with 17 satellite sales offices in

California, Florida, Georgia, Illinois, Massachusetts, North Carolina, Oregon, Pennsylvania, Tennessee, Texas, Washington, and Washington D.C.. We have closed our operations in Arizona due to the current market condition.

During the third quarter of 2007, we entered into new commitments of $121 million, which is a decrease of 74%, or $352 million, from the second quarter of 2007 and a decrease of 74%, or $350 million, from the third quarter of 2006. Renewals or refinances accounted for 72% of new commitments in the third quarter of 2007, as compared to 59% for the second quarter of 2007 and 55% for the third quarter of 2006. Builder loans outstanding, including tract construction and land and other mortgage loans, totaled $1.2 billion, or 3% of the Company’s total assets at September 30, 2007.

The rapid deterioration in the California and Florida real estate markets and the disruption in the mortgage market in the third quarter had a significant impact on our homebuilder portfolio, resulting in an increase in classified and non-performing loans and our allowance for loan losses at quarter-end. All loans in the portfolio are assigned a credit grade quarterly. Classified assets are ones with ratings of substandard, loss or doubtful. A substandard loan, for instance, is one that has a well-defined weakness such that the asset is inadequately protected by net worth, cash flow, or collateral value. There is a distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. A loan classified as doubtful has a high likelihood of a loss. Finally, the classification of loss is assigned to that portion of an asset that is considered uncollectible. We use the asset grades to determine our allowance for losses. As loans are assigned lower credit grades, the general allowance for loss number for the asset increases.

At September 30, 2007, non-performing loans for the builder construction portfolio rose to 9.03%, or $106.1 million, from 0.78%, or $9.0 million, at December 31, 2006, and zero at September 30, 2006. Classified assets were $421 million, or 35% of outstandings, at September 30, 2007, up from $121 million, or 10.3%, at December 31, 2006. Provision to the allowance for loan losses was $78.2 million or 6.0% of average loans for the third quarter of 2007, up from $2.2 million or 0.2% of average loans for the third quarter of 2006. The total allowance for loan losses as a percentage of book value increased to 8.48% of book value of total loans at September 30, 2007, compared to $19.4 million or 1.7% at September 30, 2006. Charge-offs and REO are currently zero but we do not expect they will remain at this level. The weighted average LTV ratio of this portfolio increased three percentage points to 76% compared to December 31, 2006 and September 30, 2006.

Characteristics of our homebuilder construction and development loan portfolios are detailed below:


	•	Land acquisition and development loans: This category of 55 loans totals $372 million in outstanding balances, of which three loans totaling $21 million are non-accrual and an additional seven loans at $86 million were considered classified.

	•	Land acquisition, development and construction loans: This category of 179 loans totals $803 million in outstanding balances, of which 6 loans totaling $85 million are non-accrual and an additional 20 loans at $138 million were considered classified assets at quarter-end.

We are monitoring this portfolio very closely due to rapidly changing conditions affecting both the underlying collateral values and the projected repayment sources in the current environment. We do not anticipate that the housing market will improve in the near-term, and accordingly, additional downgrades, provisions for loan losses and charge-offs relating to this portfolio are anticipated.

Information on our homebuilder portfolio is presented in the following tables as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Outstanding balance (book value)	$	1,175,473		$	1,124,330		$	1,144,835
Total commitments		1,783,395			2,093,345			2,010,727
Average loan commitments		8,574			11,135			10,810
Percentage of homes under construction or completed that are sold		34	%		41	%		37	%
Median sales price of homes		413			403			420
Non-performing loans		9.03	%		0.00	%		0.78	%
Allowance for loan losses as a percentage of book value		8.48	%		1.72	%		1.79	%
*Additional Information:*
Average LTV ratio(1)		76	%		73	%		73	%
Geographic distribution of top five states:
Southern California		37	%		38	%		41	%
Northern California		29	%		19	%		19	%

Total California		66	%		57	%		60	%
Florida		11	%		12	%		11	%
Illinois		6	%		10	%		9	%
Oregon		4	%		6	%		6	%
Arizona		3	%		5	%		4	%
Other		10	%		10	%		10	%

Total		100	%		100	%		100	%


(1)		The average LTV ratio is based on the estimated appraised value of the completed project compared to the commitment amount at the date indicated.

ELIMINATIONS & OTHER SEGMENT

This segment contains the fixed costs of our deposit raising and treasury functions that are not allocated to our operating divisions, as well as entries to eliminate the impact of transactions between segments. In addition to selling loans into the secondary market, our production divisions regularly sell loans to our SFR mortgage division. These transactions are recorded at arms-length in our segment results resulting in intercompany gain on sale in the production divisions and a premium in the SFR mortgage division that is amortized over the life of the loan. Both the gain and the premium amortization are eliminated in consolidation.

Production divisions and mortgage servicing are exposed to movements in the intermediate fixed-rate loan spreads. Mortgage spread is the difference between mortgage interest rates and LIBOR/Swap rates. Tighter spreads benefit the mortgage bank as they lead to improved loan sales execution while wider spreads lead to slower projected prepayment speeds and an increase in the MSR value. Due to the inherent difficulty in hedging the movement of these spreads, the potential for an internal hedge exists whereby the risks from the spread movements will be shared between the two groups. Starting in the first quarter of 2007, the production divisions and mortgage servicing entered into an inter-divisional transaction to economically hedge their respective financial risks to mortgage spreads for certain products in the absence of readily available derivative instruments. With all else remaining constant, when mortgage spreads widen, the pipeline of mortgage loans held for sale is negatively impacted and mortgage servicing is positively impacted. The impact of the hedges has been reflected in the respective channel results with the consolidation adjustment recorded under “Interdivision Hedge Transactions” within eliminations.

The following tables provide additional detail on deposits, treasury and eliminations for the periods indicated (dollars in thousands):


							Eliminations
										Interdivision
							Interdivision			Hedge
	Deposits			Treasury			Loan Sales(1)			Transactions			Other			Total
	(Dollars in thousands)

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	—		$	13,015		$	10,422		$	—		$	6,463		$	29,900
Provision for loan losses		—			—			—			—			—			—
Gain (loss) on sale of loans		—			—			(17,124	)		(43,884	)		3,342			(57,666	)
Service fee income (expense)		—			—			—			43,884			(15,799	)		28,085
Gain (loss) on MBS		—			—			—			—			1,269			1,269
Other income (expense)		1,152			237			—			—			(491	)		898

Net revenues (expense)		1,152			13,252			(6,702	)		—			(5,216	)		2,486
Operating expenses		7,314			15,247			—			—			(5,216	)		17,345
Deferral of expenses under SFAS 91		—			—			—			—			—			—

Pre-tax earnings (loss)		(6,162	)		(1,995	)		(6,702	)		—			—			(14,859	)

Net earnings (loss)	$	(3,753	)	$	(1,215	)	$	(4,049	)	$	—		$	—		$	(9,017	)

Three Months Ended September 30, 2006
Operating Results
Net interest income	$	—		$	8,912		$	8,290		$	—		$	4,832		$	22,034
Provision for loan losses		—			—			—			—			—			—
Gain (loss) on sale of loans		—			—			(22,996	)		—			—			(22,996	)
Service fee income (expense)		—			—			422			—			(8,894	)		(8,472	)
Gain (loss) on MBS		—			—			1,370			—			—			1,370
Other income (expense)		896			150			—			—			(1,656	)		(610	)

Net revenues (expense)		896			9,062			(12,914	)		—			(5,718	)		(8,674	)
Operating expenses		7,173			11,121			—			—			(5,357	)		12,937
Deferral of expenses under SFAS 91		—			—			—			—			(718	)		(718	)

Pre-tax earnings (loss)		(6,277	)		(2,059	)		(12,914	)		—			357			(20,893	)

Net earnings (loss)	$	(3,823	)	$	(1,254	)	$	(7,865	)	$	—		$	(199	)	$	(13,141	)


(1)		Includes loans sold of $1.6 billion and $3.0 billion for the three months ended September 30, 2007 and 2006, respectively.

CORPORATE OVERHEAD SEGMENT

As previously mentioned, we do not allocate fixed corporate overhead costs to our profit center divisions, because the methodologies to do so are arbitrary and distort each division’s marginal contribution to our profits. These unallocated corporate overhead costs are reported in the corporate overhead segment. The after-tax loss from this segment increased 45% from a loss of $26.7 million in the third quarter of 2006 to $38.8 million in third quarter of 2007. The largest driver of this increase was the previously described $27.6 million pre-tax severance expenses ($16.8 million after-tax) related to our workforce rightsizing executed during the quarter. Additionally, we paid the first dividend in the amount of $12.4 million on approximately $500 million of 8.5% preferred stock raised in May 2007. Offsetting these expense increases was a $24 million pre-tax gain ($14.6 million after-tax) on the sale and leaseback of one of our properties in Pasadena. Excluding these three items, after-tax corporate overhead expenses in the third quarter of 2007 were $24.2 million, down 9.6% versus the prior year same quarter, driven by an 11% year over year reduction in average FTEs in the corporate overhead segment and execution of other non-labor cost savings initiatives.

CONSOLIDATED RISK MANAGEMENT DISCUSSION

We manage many types of risks with several layers of risk management and oversight, using both a centralized and decentralized approach. Our philosophy is to put risk management at the core of our operations and establish a unified framework for measuring and managing risk across the enterprise, providing our business units with the tools — and accountability — to manage risk. At the corporate level, this consolidated risk management is known as Enterprise Risk Management (“ERM”). ERM, in partnership with the Board of Directors and senior management, provide support to and oversight of the business units.

ERM, as a part of management, develops, maintains and monitors our cost effective yet comprehensive enterprise-wide risk management framework, including our system of operating internal controls. ERM fosters a risk management culture throughout Indymac and exists to protect us from unexpected losses, earnings surprises and reputation damage. It also provides management and the Board with a better understanding of the trade-offs between risks and rewards, leading to smarter investment decisions and more consistent and generally higher long-term returns on equity.

CAMELS FRAMEWORK FOR RISK MANAGEMENT

The framework for organizing ERM is based on the six-point rating scale used by the Office of Thrift Supervision (“OTS”), our regulating body, to evaluate the financial condition of savings and loan associations. A discussion of the areas covered by CAMELS (Capital, Asset Quality, Management, Earnings, Liquidity and Sensitivity to Market Risk) follows.

CAPITAL

The Bank is subject to regulatory capital regulations administered by the federal banking agencies. As of September 30, 2007, the Bank met all of the requirements of a “well-capitalized” institution under the general regulatory capital regulations.

Our business is primarily centered on single-family lending and the related production and sale of loans. As such, the accumulation of MSRs is a large component of our strategy. As of September 30, 2007, the capitalized value of MSRs was $2.5 billion. OTS regulations generally impose higher capital requirements on MSRs that exceed total tier 1 capital. These higher capital requirements could result in lowered returns on our retained assets and could limit our ability to retain servicing assets. We have flexibility to sell or retain MSRs and the ability to increase our capital base through retention of earnings and other capital raising activities. While management believes that compliance with the capital limits on MSRs will not materially impact future results, no assurance can be given that our plans and strategies will be successful.

Capital Ratios

The following presents the Bank’s actual and required capital ratios and the minimum required capital ratios to be categorized as “well-capitalized” as of the period indicated (dollars in thousands):


	Capital Ratios
	Tangible			Tier 1 Core			Tier 1Risk-Based			TotalRisk-Based

September 30, 2007:
As reported pre-subprime risk-weighting		7.48	%		7.48	%		11.26	%		12.01	%
Adjusted for additional subprime risk weighting		7.48	%		7.48	%		11.06	%		11.79	%
Well-capitalized minimum		2.00	%		5.00	%		6.00	%		10.00	%
Excess over well-capitalized minimum requirement	$	1,818,528		$	823,114		$	1,018,656		$	360,630

The OTS guidance for subprime lending programs requires a lender to quantify the additional risks in its subprime lending activities and determine the appropriate amounts of allowances for loan losses and capital it needs

to offset those risks. We generally classify all non-GSE loans in a first lien position with a FICO score less than 620 and all non-GSE loans in a second lien position with a FICO score less than 660 as subprime. We report our subprime loan calculation in an addendum to the Thrift Financial Report that we file quarterly with the OTS. Subprime loans HFS and subprime loans HFI, which are either delinquent or more than 90 days old since origination, are supported by capital two times that of similar prime loans. These subprime loans totaled $463.7 million at September 30, 2007. The impact of the additional risk-weighting criteria related to subprime loans had the effect of reducing our total risk-based capital by 22 basis points from 12.01% to 11.79%.

We believe that, under current regulations, the Bank will continue to meet its “well-capitalized” minimum capital requirements in the foreseeable future. The Bank’s regulatory capital compliance could be impacted, however, by a number of factors, such as changes to applicable regulations, adverse action by our regulators, changes in our mix of assets, interest rate fluctuations, loan loss provisions and credit losses, or significant changes in the economy in areas where we have most of our loans, or future disruptions in the secondary mortgage market. Any of these factors could cause actual future results to vary from anticipated future results and consequently could have an adverse impact on the ability of the Bank to meet its future minimum capital requirements.

Capital Management and Allocation

As a federally regulated thrift, we are required to measure regulatory capital using two different methods: core capital and risk-based capital. Under the core capital method, a fixed percentage of capital is required against each dollar of assets without regard to the type of asset. Under the risk-based capital method, capital is held against assets which are adjusted for their relative risk using standard “risk weighting” percentages. We allocate capital using the regulatory minimums for well-capitalized institutions for each applicable asset class. The ratios are below the minimums due to the use of trust preferred securities as a form of regulatory capital.

The following provides information on the core and risk-based capital ratios for the two primary segments and each of their operating divisions for the period indicated (dollars in thousands):


	Total Assets					Core											Risk-Based
			% of			Avg.		% of									Avg.			% of
	Average		Total			Allocated		Total			Capital/						Allocated			Total			Capital/
Three Months Ended September 30, 2007	Assets		Assets			Capital		Capital			Assets			ROE			Capital			Capital			Assets			ROE

Mortgage Banking:
Consumer Direct	$	124,560		0.3	%	$	4,982		0.2	%		4.0	%		(14	)%	$	6,053			0.3	%		4.9	%		(11	)%

Retail		227,631		0.6	%		9,105		0.4	%		4.0	%		(445	)%		17,939			0.9	%		7.9	%		(224	)%
Wholesale		5,623,117		15.3	%		224,925		10.9	%		4.0	%		(77	)%		275,232			13.4	%		4.9	%		(62	)%
Correspondent		1,261,039		3.4	%		50,442		2.5	%		4.0	%		(112	)%		64,199			3.1	%		5.1	%		(87	)%
Conduit		4,958,140		13.5	%		198,326		9.7	%		4.0	%		(119	)%		236,397			11.5	%		4.8	%		(99	)%

Total Mortgage Professionals Group		12,069,927		32.8	%		482,798		23.5	%		4.0	%		(105	)%		593,767			28.9	%		4.9	%		(84	)%
Financial Freedom		1,263,677		3.4	%		146,331		7.1	%		11.6	%		8	%		135,741			6.6	%		10.7	%		8	%

Total Production Divisions		13,458,164		36.5	%		634,111		30.8	%		4.7	%		(78	)%		735,561			35.8	%		5.5	%		(67	)%

Mortgage Servicing Rights		3,714,352		10.1	%		243,378		11.8	%		6.6	%		141	%		358,217			17.4	%		9.6	%		97	%
Servicing/Customer Retention		887,211		2.4	%		35,488		1.7	%		4.0	%		(26	)%		41,020			2.0	%		4.6	%		(22	)%

Total Mortgage Servicing		4,601,563		12.5	%		278,866		13.5	%		6.1	%		120	%		399,237			19.4	%		8.7	%		85	%
Mortgage Bank Overhead		158,231		0.4	%		6,330		0.3	%		4.0	%		N/A			17,315			0.8	%		10.9	%		N/A

Total Consumer Mortgage Banking		18,217,958		49.4	%		919,307		44.6	%		5.0	%		(22	)%		1,152,113			56.0	%		6.3	%		(17	)%
Commercial Mortgage Banking		68,200		0.2	%		2,728		0.1	%		4.0	%		(207	)%		5,551			0.3	%		8.1	%		(100	)%

Total Mortgage Banking		18,286,158		49.6	%		922,035		44.7	%		5.0	%		(23	)%		1,157,664			56.3	%		6.3	%		(17	)%
Thrift:
Investment grade securities		4,628,416		12.6	%		185,137		9.0	%		4.0	%		(12	)%		88,247			4.3	%		1.9	%		(29	)%
Non-investment grade and residuals		448,297		1.2	%		17,932		0.9	%		4.0	%		(733	)%		229,011			11.1	%		51.1	%		(54	)%

Total Mortgage-Backed Securities		5,076,713		13.8	%		203,069		9.9	%		4.0	%		(76	)%		317,258			15.4	%		6.2	%		(47	)%

Consumer lending portfolio Prime SFR mortgage loans		5,483,500		14.9	%		219,340		10.7	%		4.0	%		(12	)%		199,024			9.7	%		3.6	%		(13	)%
Home equity division		1,745,687		4.7	%		69,989		3.4	%		4.0	%		(120	)%		124,106			6.0	%		7.1	%		(66	)%

Total Consumer Loans		7,229,187		19.6	%		289,329		14.1	%		4.0	%		(38	)%		323,130			15.7	%		4.5	%		(34	)%
Consumer construction division		2,976,162		8.1	%		119,046		5.8	%		4.0	%		9	%		151,704			7.4	%		5.1	%		8	%

Total Consumer Thrift Activities		10,205,349		27.7	%		408,375		19.9	%		4.0	%		(24	)%		474,834			23.1	%		4.7	%		(20	)%

Home builder division		1,249,004		3.4	%		49,960		2.4	%		4.0	%		(340	)%		104,399			5.1	%		8.4	%		(161	)%
Warehouse Lending		182,644		0.5	%		7,306		0.4	%		4.0	%		17	%		15,211			0.7	%		8.3	%		10	%

Total Commercial Thrift Activities		1,431,648		3.9	%		57,266		2.8	%		4.0	%		(295	)%		119,610			5.8	%		8.4	%		(139	)%
Discontinued products		26,574		0.1	%		1,063		0.1	%		4.0	%		(27	)%		2,771			0.1	%		10.4	%		(8	)%

Total Thrift Activities		16,740,284		45.5	%		669,773		32.7	%		4.0	%		(63	)%		914,473			44.4	%		5.5	%		(45	)%
Consumer Bank — Deposits		59,589		0.2	%		2,384		0.1	%		4.0	%		N/A			11,335			0.6	%		19.0	%		N/A
Treasury		—		—			—		—			N/A			N/A			—			—			N/A			N/A
Eliminations		—		—			—		—			N/A			N/A			—			—			N/A			N/A

Total Operating Activities		35,086,031		95.3	%		1,594,192		77.5	%		4.5	%		(42	)%		2,083,472			101.3	%		5.9	%		(31	)%
Corporate overhead		1,746,999		4.7	%		460,189		22.5	%		26.3	%		N/A			(29,091	)		(1.3	)%		(1.7	)%		N/A

Total Company	$	36,833,030		100.0	%	$	2,054,381		100.0	%		5.6	%		(39	)%	$	2,054,381			100.0	%		5.6	%		(39	)%

As the table shows, certain asset types require more or less capital depending on the capital measurement method. For example, non-investment grade and residual securities are allocated 4.0% core capital and 51.1% risk-based capital. These differing methods result in significantly different ROEs as shown. We attempt to manage our business segments and balance sheet to optimize capital efficiency under both capital methods.

ASSET QUALITY

Indymac uses both a centralized and a decentralized approach to credit risk management. At the corporate level, ERM oversees the development of a framework (through people, policies and processes) for credit risk management that the business unit leaders can use to document and “matrix manage” their credit and fraud risk. This framework includes the establishment and enforcement of strong corporate credit governance to maintain investment, lending and fraud polices that are simple, but highly effective. Each business unit has its own chief credit officer to oversee and implement these procedures. By tracking historical credit losses and factors contributing to the losses, we continuously implement changes to significantly reduce the likelihood of similar losses repeating. This ongoing analysis of credit performance provides a feedback loop that serves to continually refine and enhance credit risk policies.

We assume a degree of credit risk in connection with our investments in certain mortgage securities and loans held for investment and sale as well as with our construction lending operations. We also retain limited credit exposure from repurchase obligations on the sale of mortgage loans through standard representations and warranties to investors.

The following shows a summary of reserves against our key credit risks as of September 30, 2007 (dollars in millions):


				“Reserve”
Credit Risk Area	Reserve Type	Balance		Balance		UPB

Mortgage Banking:
Loans held for sale(1)	Market valuation reserve	$	14,022	$	298	$	14,081
Repurchase risk(2)	Secondary market reserve		N/A		57		173,915
Thrift:
Loans held for investment(3)	Allowance for loan losses		8,553		162		8,495
Non-investment grade and residual securities(4)	Loss assumption in valuations		416		835		22,770
Foreclosed Assets	Reduction in book value due to liquidation costs and/or property value deterioration		123		36		159


(1)		Risks include borrower’s credit deteriorating and adversely impacting loan saleability; further deterioration of credit quality of loans previously repurchased for repurchase/warranty issues or through called deals; and actual losses exceeding losses that are assumed in our valuations. The reserve includes credit marks on delinquent loans plus credit related marks on performing loans.

(2)		Risks include repurchase of impaired loans due to early payment default (“EPD”) or other repurchase and warranty violations beyond the amount reserved at time of sale.

(3)		Risk includes credit losses exceeding the risk priced for in the allowance.

(4)		Reserve balance for non-investment grade and residual securities represents the expected remaining cumulative losses.

Non-Performing Assets

Loans are generally placed on non-accrual status when they are 90 days past due. Non-performing assets include non-performing loans and foreclosed assets. We record the balance of our assets acquired in foreclosure or by deed in lieu of foreclosure at estimated net realizable value.

The following summarizes our non-performing assets as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Non-performing loans HFI	$	339,530		$	78,831		$	108,483
Non-performing loans HFS		365,794			42,717			54,347

Total non-performing loans		705,324			121,548			162,830
Foreclosed assets		123,330			18,498			21,638

Total non-performing assets	$	828,654		$	140,046		$	184,468

Total non-performing assets to total assets		2.46	%		0.51	%		0.63	%

At September 30, 2007, non-performing assets as a percentage of total assets was 2.46%, increasing from 0.63% at December 31, 2006. Non-performing loans in loans held for investment and loans held for sale increased $231.0 million and $311.4 million, respectively, from December 31, 2006. As a result of the increased delinquencies in these portfolios, foreclosure activities rose during the period, leading to foreclosed assets of $123.3 million at September 30, 2007. The weakening real estate market and the general tightening of underwriting in the mortgage industry continue to have a negative impact to our portfolios. It became increasingly difficult for distressed borrowers to find alternative financing in order to avoid foreclosure. This resulted in a higher percentage of loans going through foreclosure and a longer average time for us to liquidate our foreclosed assets. If such market condition persists, we can continue to expect an even higher level of non-performing loans in the future.

The following provides additional comparative data on non-performing loans for the loans HFI portfolio as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

SFR mortgage loans	$	176,107		$	54,233		$	66,360
Consumer construction division		52,901			18,693			25,957
Homebuilder division		106,089			—			8,981
Other(1)		4,433			5,905			7,185

Total non-performing loans HFI	$	339,530		$	78,831		$	108,483

Allowance for loan losses to non-performing loans HFI		48	%		77	%		58	%


(1)		Includes loans from the home equity division, discontinued products and the warehouse lending division.

The increase in non-performing loans HFI is mainly seen in the SFR mortgage and the homebuilder division portfolios. The non-performing loans in our homebuilder division’s portfolio are in markets that have seen both price and sales decline over the last several months. For further discussion on this portfolio, see “Homebuilder Division” on page 28.

Allowance for Loan Losses

For the loans held for investment portfolio, an allowance for loan losses is established and allocated to various loan products for segment reporting purposes. The determination of the level of the allowance for loan losses and, correspondingly, the provision for loan losses, is based on delinquency trends and prior loan loss experience and management’s judgment and assumptions regarding various matters, including general economic conditions and loan portfolio composition. Management continually evaluates these assumptions and various relevant factors impacting credit quality and inherent losses. A component of the overall allowance for loan losses is not specifically allocated (“unallocated component”). The unallocated component reflects management’s assessment of various factors that create inherent imprecision in the methods used to determine the specific portfolio allocations. Those factors include, but are not limited to, levels of and trends in delinquencies and impaired loans, charge-offs and recoveries, volume and terms of the loans, effects of any changes in risk selection and underwriting standards, other

changes in lending policies, procedures, and practices, and national and local economic trends and conditions. As of September 30, 2007, the unallocated component of the total allowance for loan losses was $43.9 million, compared to $17.2 million at December 31, 2006.

The following summarizes our loans HFI portfolio by loan type and the corresponding allowance for loan losses as of September 30, 2007 (dollars in thousands):


					Total
			Allowance		Reserves as a
			for Loan		Percentage of
By Division	Book Value		Losses		Book Value

SFR mortgage loans HFI division	$	4,883,392	$	41,265		0.85	%
Consumer construction division		2,395,361		13,738		0.57	%
Homebuilder division		1,175,473		99,638		8.48	%
Other(1)		98,403		7,127		7.24	%

Total HFI portfolio at September 30, 2007	$	8,552,629	$	161,768		1.89	%

Total HFI portfolio at December 31, 2006	$	10,177,209	$	62,386		0.61	%

For the homebuilder division, allowance for loan losses increased to $99.6 million of $8.48% of the book value of its portfolio. We are monitoring this portfolio very closely due to rapidly changing conditions affecting both the underlying collateral values and the projected repayment sources in the current environment.

Summarized below are changes to the allowance for loan losses for the periods indicated (dollars in thousands):


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2007			2006			2007			2006

Balance, beginning of period	$	76,856		$	57,912		$	62,386		$	55,168
Allowance transferred to loans HFS		—			—			(1,988	)		—
Provision for loan losses		98,279			4,988			126,170			11,040
Charge-offs:
SFR mortgage loans HFI division		(7,170	)		(600	)		(13,149	)		(1,405	)
Consumer construction division		(4,816	)		(754	)		(7,950	)		(2,005	)
Other(1)		(1,816	)		(1,274	)		(6,174	)		(3,102	)

Total charge-offs		(13,802	)		(2,628	)		(27,273	)		(6,512	)

Recoveries:
SFR mortgage loans HFI division		181			75			560			313
Consumer construction division		15			219			65			231
Other(1)		239			469			1,848			795

Total recoveries		435			763			2,473			1,339

Total charge-offs, net of recoveries		(13,367	)		(1,865	)		(24,800	)		(5,173	)

Balance, end of period	$	161,768		$	61,035		$	161,768		$	61,035

Annualized charge-offs to average loans HFI		0.62	%		0.08	%		0.36	%		0.08	%


(1)		Includes loans from the home equity, discontinued product and warehouse lending divisions.

In the third quarter of 2007, net charge-offs increased to $13.4 million from $1.9 million in the third quarter of 2006, primarily in the SFR mortgage and the consumer construction division portfolios. This is consistent with the

overall conditions in both the mortgage and the housing markets that contributed to the overall increase in delinquencies and loans migrating through the foreclosure process.

Credit Discounts

Due to the disruption in the secondary mortgage market, our HFS loans increased to $14.0 billion as the market for certain products stopped functioning. As a result of our thrift structure, our capital and liquidity position allowed us to retain HFS loans in the third quarter of 2007 when many of our peers were forced to sell assets to meet margin calls. We expect to transfer a portion of these loans to HFI in the next two quarters.

The following summarizes our loans HFS portfolio, the corresponding market valuation reserves and non-performing assets as of the dates indicated (dollars in thousands):


	September 30,			September 30,			December 31,
	2007			2006			2006

Loans HFS before market valuation reserves	$	14,361,177		$	8,368,626		$	9,507,307
Market valuation reserves		(338,943	)		(27,704	)		(39,464	)

Net loans HFS portfolio	$	14,022,234		$	8,340,922		$	9,467,843

Market valuation reserves as a percentage of gross loans HFS		2.36	%		0.33	%		0.42	%

Non-performing loans HFS before market valuation reserves	$	487,314		$	63,422		$	78,238
Market valuation reserves		(121,520	)		(20,705	)		(23,891	)

Net non-performing loans HFS	$	365,794		$	42,717		$	54,347

Non-performing loans held for sale as a percentage of net loans HFS portfolio		2.61	%		0.51	%		0.57	%

The LOCOM reserve on current loans totaled $111 million at September 30, 2007, which is included in the market valuation reserves of $338.9 million above. We believe that approximately $70 million of that is credit related.

Secondary Market Reserve

We do not generally sell loans with recourse in our loan sale activities. However, we can be required to repurchase loans from investors when our loan sales contain individual loans that do not conform to the representations and warranties we made at the time of sale (including early payment default provisions). We have made significant investments in our pre-production and post-production quality control processes to identify potential issues that could cause repurchases. We believe that these efforts have improved our production quality; however, possible increases in default rates could cause the overall rate of repurchases to increase. We maintain a secondary market reserve for losses that arise in connection with loans that we may be required to repurchase from whole loan sales, sales to the GSEs, and securitizations. The reserve has two general components: reserves for repurchases arising from representation and warranty claims and reserves for repurchases arising from early payment defaults.

The following reflects the loan sale and repurchase activities during the periods indicated (dollars in millions):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Loans sold:
GSEs and whole loans	$	8,804		$	11,589		$	36,765		$	32,227
Securitization trusts		4,205			7,919			20,974			23,405

Total	$	13,009		$	19,508		$	57,739		$	55,632

Total repurchases(1)	$	118		$	57		$	562		$	119

Repurchases as a percentage of total loans sold during the period		0.91	%		0.29	%		0.97	%		0.21	%


(1)		Amounts exclude repurchases that are administrative in nature and generally are re-sold immediately at little or no loss.

As a percentage of total loans sold, repurchases have increased significantly to 91 basis points for the third quarter of 2007 from 29 basis points for the third quarter of 2006. The increase is mainly due to early payment defaults on certain products, primarily 80/20s and pay option ARMs purchased through the conduit channel. The Company has made several improvements in its underwriting guidelines and has started to see the benefits of tightened guidelines as repurchases came down from the peak of $224 million in the first quarter of 2007. In addition, we have significantly reduced the percentage of whole loan sales. As a result, we expect future repurchases due to early payment defaults to continue to decline.

The following reflects the activity in the secondary market reserve during the periods indicated (dollars in thousands):


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2007			2006			2007			2006

Balance, beginning of period	$	46,614		$	35,402		$	33,932		$	27,638
Additions/provisions		32,008			9,374			87,913			24,147
Actual losses/mark-to-market		(21,909	)		(14,639	)		(65,773	)		(22,423	)
Recoveries on previous claims		404			53			1,045			828

Balance, end of period	$	57,117		$	30,190		$	57,117		$	30,190

Reserve levels are a function of expected losses based on actual pending and expected claims and repurchase requests, historical experience, loan volume and loan sales distribution channels and the assessment of the probability of investor claims. While the ultimate amount of repurchases and claims is uncertain, management believes the reserve is adequate. In response to increased repurchases and related losses, the provision for the secondary market reserve increased to $32.0 million for the three months ended September 30, 2007 from $9.4 million for the three months ended September 30, 2006. We relieved $21.9 million of secondary market reserve in the third quarter of 2007 mainly for mark-to-market adjustments on loans repurchased during the quarter, of which 80/20s and pay option ARMs accounted for over 85% of the adjustments. As previously discussed, we have started to see benefits from guideline changes implemented in the first quarter of 2007. Thus, our repurchase activities should continue to improve as the tightened guidelines take full effect. We will continue to evaluate the adequacy of our reserve and allocate a portion of our gain on sale proceeds to the reserve going forward. Secondary market reserve is included on the consolidated balance sheets as a component of other liabilities.

Credit Reserves Embedded in Non-Investment Grade and Residual Securities

As part of the securitization process, we create non-investment grade and residual securities which can be sold into the secondary market or retained on the balance sheet. These securities provide credit enhancement to absorb the losses in the securitization trust.

The following table shows more information on our non-investment grade and residual securities as of the dates indicated (dollars in millions):


	September 30,			September 30,			June 30,
	2007			2006			2007

Non-investment Grade and Residual Securities:
Fair market value	$	416		$	340		$	443
As a percentage of tier 1 core capital		17	%		17	%		18	%
UPB of underlying collateral	$	22,770			11,575		$	21,002
Credit reserves embedded in value	$	835			432		$	698
Additions to credit reserves	$	228			61		$	126
Net charge-off (losses)	$	91			7		$	49
Credit reserves/NPAs		56	%		62	%		91	%

MANAGEMENT

We manage key CAMELS risks through policies and procedures that begin with the Board, senior executives and the ERM group, creating standardized frameworks and processes for the business units to implement. We strive for accountability, transparency and consistency, including a semi-annual certification process that keeps business units up to date on the administration of key CAMELS risks. Management maintains a central database of internally identified findings, and this, in conjunction with operational and financial controls, requiresfollow-up and accountability for any issues identified in this process.

Models are used as key decision making tools in executing transactions, such as the pricing and trading of loans, and in hedging risks. They are also used to assist us in valuing assets and liabilities that don’t have readily available market prices. Given the importance of these models to our operations and financial position, it is the responsibility of Corporate Model Management and Research (“CMMR”) to develop and maintain an effective model management framework across the Company. CMMR determines that key models are consistent and accurate (e.g., utilize the best available assumptions, particularly for prepayment and credit) across the enterprise and result in the correct economic decisions being made and assets and liabilities being properly valued (both on a GAAP and economic basis).

EARNINGS

Our regulators evaluate the quality and consistency of our earnings. See “Narrative Summary of Consolidated Financial Results” on page 7 and “Summary of Business Segment Results” on page 9 for a discussion of our earnings for the three and nine months ended September 30, 2007.

LIQUIDITY

During the third quarter of 2007, the secondary market for MBS and asset-backed securities (“ABS”) experienced a significant disruption resulting in a decline in overall market liquidity. In addition, several extendible Asset-Backed Commercial Paper (“ABCP”) facilities had an extension event, which contributed to the deterioration of liquidity in the market. In response to these disruptions, Indymac shifted its funding strategy from extendible ABCP and wholesale repurchase facilities to deposits and borrowing from the Federal Home Loan Bank (“FHLB”). As a result of this effort, we were able to increase our deposits and advances from FHLB by $5.0 billion and $0.2 billion, respectively, during the quarter.

Our principal financing needs are to fund acquisitions of mortgage loans and our investment in mortgage loans, MBS and MSRs. Our primary sources of funds used to meet these financing needs are loan sales and securitizations, deposits, advances from the FHLB, borrowings, custodial balances and retained earnings. The sources used vary depending on such factors as rates paid, collateral requirements, maturities and the impact on our capital. Additionally, we may occasionally securitize mortgage loans that we intend to hold for investment to lower our costs of borrowing against such assets and reduce the capital requirement associated with such assets. At

September 30, 2007, we had total liquidity of $6.3 billion consisting of $0.8 billion in short-term liquidity (primarily cash) and $4.9 billion in operating liquidity, which represents unpledged liquid assets on hand plus amounts that may be immediately raised through the pledging of other available assets as collateral pursuant to committed financing facilities. We also had access to $0.6 billion in financing at the Federal Reserve Discount Window. At June 30, 2007, our total liquidity was $3.5 billion. We currently believe that our liquidity level is sufficient to satisfy our operating requirements and meet our obligations and commitments in a timely and cost effective manner.

The following presents the components of our major sources of funds as of the dates indicated (dollars in thousands):


	September 30,		September 30,		December 31,
	2007		2006		2006

Deposits	$	16,774,638	$	10,111,019	$	10,898,006
Advances from FHLB		11,094,800		9,332,800		10,412,800
Other borrowings:
Asset-backed commercial paper		1,504,678		499,244		2,114,508
Loans and securities sold under agreements to repurchase		—		2,874,048		1,405,505
HELOC notes payable		243,019		807,932		659,283
Trust preferred debentures		441,232		412,516		456,695
Other notes payable		752		1,180		1,009

Total other borrowings		2,189,681		4,594,920		4,637,000

	$	30,059,119	$	24,038,739	$	25,947,806

Principal Sources of Cash

Loan Sales and Securitizations

Our business model relies heavily upon selling the majority of our mortgage loans shortly after acquisition. The proceeds of these sales are a critical component of our liquidity. Due to the disruption of the MBS and ABS secondary markets, loan sales and securitizations were adversely impacted, resulting in lower than normal volume and consequently balance sheet growth. During the three months ended September 30, 2007, we sold $13.0 billion of mortgage loans, which represented approximately 77% of our funded mortgage loans during the period, to third-party investors through three channels: (1) GSEs; (2) private label securitizations; and (3) whole loan sales. Our prime SFR mortgage loan portfolio also acquired $469.8 million of the mortgage loans for our portfolio of mortgage loans HFI to provide future interest income. The remainder of our funded mortgage loans during the quarter is retained in our HFS portfolio for future sale or transferred to HFI.

Our business model has been negatively impacted as our sales channels continue to be disrupted. As a result, our earnings were also adversely impacted. If these disruptions continue, or there are other economic events or factors beyond our control, our earnings could continue to be negatively impacted.

Deposits/Retail Bank

We solicit deposits from the general public and institutions by offering a variety of accounts and rates through our network of 31 branches (up from 27 branches as of September 30, 2006) in Southern California and our telebanking, Internet, and Money Desk and Institutional channels. Through our web site atwww.indymacbank.com, consumers can access their accounts24-hours a day, seven days a week. Online banking allows customers to access their accounts, view balances, transfer funds between accounts, view transactions, download account information, and pay their bills conveniently from any computer terminal. Total deposits increased to $16.8 billion at September 30, 2007, up from $10.1 billion at September 30, 2006 and $10.9 billion at December 31, 2006.

Advances from the Federal Home Loan Bank

The FHLB system functions as a borrowing source for regulated financial depositories and similar institutions that are engaged in residential housing finance. As a member of the FHLB of San Francisco, we are required to own capital stock of the FHLB and are authorized to apply for advances from the FHLB, on a secured basis, in amounts determined by reference to available collateral. SFR mortgage loans, agency and AAA-rated MBS are the principal collateral that may be used to secure these borrowings, although certain other types of loans and other assets may also be accepted pursuant to FHLB policies and statutory requirements. The FHLB offers several credit programs, each with its own fixed or floating interest rate, and a range of maturities.

Currently, Indymac Bank is approved for collateralized advances of up to $17.1 billion. At September 30, 2007, advances from the FHLB totaled $11.1 billion, of which $6.4 billion were collateralized by mortgage loans and $4.7 billion were collateralized by mortgage-backed securities.

Other Borrowings, Excluding Subordinated Debentures Underlying Trust Preferred Securities

Other borrowings, excluding the subordinated debentures underlying the trust preferred securities, consist of asset-backed commercial paper, loans and securities sold under committed financing facilities and uncommitted agreements to repurchase, and notes payable. Total other borrowings decreased to $1.7 billion at September 30, 2007, from $4.2 billion at December 31, 2006. We reduced our repurchase agreement borrowings and extendible ABCP to zero at September 30, 2007 as a result of our strategy to increase our deposits and advances from the FHLB.

At September 30, 2007, we had $8.1 billion in committed financing facilities ($8.0 billion whole loan facilities and $100 million in unsecured revolving line of credit). Of these committed financing facilities, $0.9 billion was available for use, based on pledged collateral. Our use of these facilities is expected to be substantially less in future periods as a result of our growth in deposit funds. Decisions by our lenders and investors to make additional funds available to us in the future will depend upon a number of factors. These include our compliance with the terms of existing credit arrangements, our financial performance, eligible collateral, changes in our credit rating, industry and market trends in our various businesses, the general availability and interest rates applicable to financing and investments, the lenders’and/or investors’ own resources and policies concerning loans and investments and the relative attractiveness of alternative investment or lending opportunities.

In April 2006, we established the North Lake Capital Funding Program, a single seller extendible ABCP facility, which allows us to issue directly, secured liquidity notes backed by mortgage loans. Both the collateral pledged and secured liquidity notes are recorded on our balance sheet as assets and liabilities, respectively. This facility was subsequently renewed in July 2007. The secured liquidity notes have been rated F-1+ by Fitch Ratings,P-1 by Moody’s Investors Service andA-1+ by Standard & Poor’s, and are supported by credit enhancements, such as over collateralization, excess spread and market value agreements provided by highly rated counterparties. We are authorized to issue up to $4.0 billion in short-term notes, with expected maturities not to exceed 180 days after issuance and final maturities of 60 days following the expected maturities. As a result of the disruption in the extendible ABCP market, we have actively paid down this facility during the third quarter of 2007. Additionally, the viability of the extendible ABCP market and this facility is unknown and therefore, at this time we are not relying on this facility for future funding needs.

In November 2006, we established a multi-seller ABCP facility (which is supported by backstop liquidity facilities from highly rated banks) to provide up to $1.5 billion dedicated financing for our construction to permanent, lot, and reverse mortgage loans. This is an annually renewable364-day committed facility administered by Citicorp North America, Inc. As of September 30, 2007, we had $1.5 billion outstanding under this facility. This facility experienced no material disruption despite the liquidity disruption in the third quarter.

Trust Preferred Securities and Warrants

On November 14, 2001, we completed an offering of Warrants and Income Redeemable Equity Securities (“WIRES”) to investors. Gross proceeds of the transaction were $175 million. The securities were offered as units

consisting of trust preferred securities, issued by a trust formed by us, and warrants, to purchase our common stock. As part of this transaction, we issued subordinated debentures to the trust and purchased common securities from the trust. The yield on the subordinated debentures and the common securities is the same as the yield on the trust preferred securities. As part of the WIRES offering, 3.5 million warrants were issued with each convertible into 1.5972 shares of our common stock. Beginning on November 14, 2006, Indymac had the option to redeem the warrants for cash equal to the warrant value, subject to the conditions in the prospectus. No warrants were exercised in the third quarter of 2007. To date, 2.6 million warrants have been exercised and converted into a total of 4.2 million shares of our common stock. Subordinated debentures redeemed to date in conjunction with the warrant exercises totaled $130.2 million as of September 30, 2007.

No new trust preferred securities were issued during the third quarter of 2007. To date, we have issued $398 million trust preferred securities (without warrants attached) with interest rates ranging from 5.83% to 7.37%. Interest rates on these securities are fixed for terms ranging from five to 10 years, after which the rates reset quarterly indexed to3-month LIBOR. The securities can be called at our option five or 10 years after issuance. In each of these transactions, we issued subordinated debentures to, and purchased common securities from, each of the trusts. The rates on the subordinated debentures and the common securities in each of these transactions match the rates on the related trust preferred securities. The proceeds of these securities have been used in ongoing operations. Book values of the subordinated debentures underlying the trust preferred securities, which represent the liabilities due from us to the trusts, totaled $441.2 million and $456.7 million at September 30, 2007 and December 31, 2006, respectively. These subordinated debentures are included in other borrowings on the consolidated balance sheets.

Direct Stock Purchase Plan

Our direct stock purchase plan offers investors the ability to purchase shares of our common stock directly over the Internet. During the quarter ended September 30, 2007, we raised $74.2 million of capital by issuing 3,467,493 shares common stock through this plan.

Cash from Operating Activities

In addition to the financing sources discussed above, our cash needs are funded by net cash flows from operations before net purchases and originations of loans held for sale, sales of mortgage-backed securities and principal and interest payments on loans and securities. The amounts of net acquisitions of loans held for sale, and trading securities included as components of net cash used in operating activities, totaled $6.7 billion during the nine months ended September 30, 2007 and $5.7 billion during the nine months ended September 30, 2006. Excluding the purchase and sale activity for loans held for sale and trading securities, the net cash provided by the Company’s operating activities totaled $123.2 million and $291.5 million for the nine months ended September 30, 2007 and 2006, respectively.

SENSITIVITY TO MARKET RISK

A key area of risk for us is interest rate risk sensitivity. This is due to the impact that changes in interest rates can have on the demand for mortgages, as well as the value of loans in our pipeline and assets on our balance sheet, particularly the valuation of our MSRs. To manage interest rate risk sensitivity we have a Centralized Interest Rate Risk Group (“CIRRG”). CIRRG fosters an interest rate and market risk management culture throughout the Company and exists to assist in protecting the Company from unexpected losses, earnings surprises and reputation damage due to interest rate risk. It also provides management and the Board with a better understanding of the trade-offs between risk and rewards, leading to smarter risk management and investment decisions, and more consistent and generally higher long term returns on equity. We hedge our assets at the portfolio level, to ensure accountability and make certain that each portfolio can stand on its own.

To evaluate our ability to manage interest rate risk, there are a number of performance measures we track. These include net interest margin for both total company as well as our segments, the fluctuation in net interest income and expense and average balances, and the net portfolio value of our net assets.

Net Interest Margin

Information regarding our consolidated average balance sheets (all segments are combined), along with the total dollar amounts of interest income and interest expense and the weighted-average interest rates follows (dollars in thousands):


	Three Months Ended
	September 30, 2007							September 30, 2006							June 30, 2007
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Rate			Balance		Interest		Rate			Balance		Interest		Rate

Assets
Securities	$	5,668,118	$	101,901		7.13	%	$	4,889,155	$	86,212		7.00	%	$	5,221,396	$	95,537		7.34	%
Loans held for sale		16,019,841		283,882		7.03	%		10,825,266		196,924		7.22	%		16,208,651		289,262		7.16	%
Mortgage loans held for investment		5,528,258		88,075		6.32	%		6,079,803		92,005		6.00	%		5,615,519		88,622		6.33	%
Builder construction loans		826,952		18,186		8.72	%		773,132		21,191		10.87	%		815,861		20,209		9.94	%
Consumer construction loans		2,284,744		45,788		7.95	%		2,085,453		38,292		7.28	%		2,190,732		44,519		8.15	%
Investment in Federal Home Loan Bank stock and other		1,366,645		20,019		5.81	%		854,208		12,127		5.63	%		1,202,869		16,328		5.44	%

Total interest-earning assets		31,694,558		557,851		6.98	%		25,507,017		446,751		6.95	%		31,255,028		554,477		7.12	%

Mortgage servicing assets		2,375,127							1,552,295							2,153,439
Other assets		2,763,345							2,080,669							2,428,034

Total assets	$	36,833,030						$	29,139,981						$	35,836,501

Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	12,943,759		170,540		5.23	%	$	9,208,481		113,758		4.90	%	$	10,761,811		138,618		5.17	%
Advances from Federal Home Loan Bank		13,876,996		183,192		5.24	%		9,783,887		115,769		4.69	%		14,059,734		184,175		5.25	%
Other borrowings		4,177,567		61,941		5.88	%		5,682,601		80,513		5.62	%		5,737,455		82,440		5.76	%

Total interest-bearing liabilities		30,998,322		415,673		5.32	%		24,674,969		310,040		4.99	%		30,559,000		405,233		5.32	%

Other liabilities		3,780,327							2,593,633							3,199,927

Total liabilities		34,778,649							27,268,602							33,758,927
Shareholders’ equity		2,054,381							1,871,379							2,077,574

Total liabilities and shareholders’ equity	$	36,833,030						$	29,139,981						$	35,836,501

Net interest income			$	142,178						$	136,711						$	149,244

Net interest spread(1)						1.66	%						1.96	%						1.80	%

Net interest margin(2)						1.78	%						2.13	%						1.92	%


(1)		Net interest spread calculated as the yield on total average interest-earnings assets less the yield on total average interest-bearing liabilities.

(2)		Net interest margin calculated as annualized net interest income divided by total average interest-earning assets.


	Nine Months Ended
	September 30, 2007							September 30, 2006
	Average				Yield			Average				Yield
	Balance		Interest		Rate			Balance		Interest		Rate

Assets
Securities	$	5,423,462	$	289,717		7.14	%	$	4,541,302	$	233,693		6.88	%
Loans held for sale		15,562,904		825,301		7.09	%		10,650,644		551,564		6.92	%
Mortgage loans held for investment		6,081,216		285,691		6.28	%		6,014,437		260,276		5.79	%
Builder construction loans		810,831		58,148		9.59	%		726,227		55,775		10.27	%
Consumer construction loans		2,211,740		133,953		8.10	%		1,967,259		102,794		6.99	%
Investment in Federal Home Loan Bank stock and other		1,238,677		52,195		5.63	%		834,396		32,706		5.24	%

Total interest-earning assets		31,328,830		1,645,005		7.02	%		24,734,265		1,236,808		6.69	%

Mortgage servicing assets		2,133,909							1,377,586
Other assets		2,546,210							1,695,257

Total assets	$	36,008,949						$	27,807,108

Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	11,356,004		441,225		5.19	%	$	8,255,056		280,841		4.55	%
Advances from Federal Home Loan Bank		13,863,474		541,896		5.23	%		9,839,691		329,846		4.48	%
Other borrowings		5,439,668		235,392		5.79	%		5,844,576		232,046		5.31	%

Total interest-bearing liabilities		30,659,146		1,218,513		5.31	%		23,939,323		842,733		4.71	%

Other liabilities		3,294,773							2,129,600

Total liabilities		33,953,919							26,068,923
Shareholders’ equity		2,055,030							1,738,185

Total liabilities and shareholders’ equity	$	36,008,949						$	27,807,108

Net interest income			$	426,492						$	394,075

Net interest spread						1.71	%						1.98	%

Net interest margin						1.82	%						2.13	%

Average balances are calculated on a daily basis. Non-performing loans are included in the average balances for the periods presented. The allowance for loan losses is excluded from the average loan balances and included in the average other assets line. Minority interest and perpetual preferred stock in subsidiary are included in average other liabilities.

Interest income and interest expense fluctuations depend upon changes in the average balances and interest rates of interest-earning assets and interest-bearing liabilities. The following tables detail the changes in interest income and expense by key attribute (dollars in thousands):


	Increase/(Decrease) Due to
	Volume(1)			Rate(2)			Mix(3)			Total Change

Three Months Ended September 30, 2007 vs. 2006 Interest income:
Securities	$	13,736		$	1,685		$	268		$	15,689
Loans held for sale		94,495			(5,093	)		(2,444	)		86,958
Mortgage loans held for investment		(8,346	)		4,857			(441	)		(3,930	)
Builder construction loans		1,475			(4,189	)		(291	)		(3,005	)
Consumer construction loans		3,659			3,502			335			7,496
Investment in Federal Home Loan Bank stock and other		7,275			386			231			7,892

Total interest income		112,294			1,148			(2,342	)		111,100
Interest expense:
Interest-bearing deposits		46,144			7,568			3,070			56,782
Advances from Federal Home Loan Bank		48,432			13,389			5,602			67,423
Other borrowings		(21,324	)		3,743			(991	)		(18,572	)

Total interest expense		73,252			24,700			7,681			105,633

Net interest income	$	39,042		$	(23,552	)	$	(10,023	)	$	5,467


	Increase/(Decrease) Due to
	Volume(1)			Rate(2)			Mix(3)			Total Change

Nine Months Ended September 30, 2007 vs. 2006 Interest income:
Securities	$	45,395		$	8,900		$	1,729		$	56,024
Loans held for sale		254,391			13,240			6,106			273,737
Mortgage loans held for investment		2,890			22,278			247			25,415
Builder construction loans		6,498			(3,694	)		(431	)		2,373
Consumer construction loans		12,775			16,352			2,032			31,159
Investment in Federal Home Loan Bank stock and other		15,847			2,454			1,188			19,489

Total interest income		337,796			59,530			10,871			408,197
Interest expense:
Interest-bearing deposits		105,496			39,900			14,988			160,384
Advances from Federal Home Loan Bank		134,885			54,768			22,397			212,050
Other borrowings		(16,076	)		20,868			(1,446	)		3,346

Total interest expense		224,305			115,536			35,939			375,780

Net interest income	$	113,491		$	(56,006	)	$	(25,068	)	$	32,417


(1)		Changes in volume are calculated by taking changes in average balances multiplied by the prior period’s average interest rate.

(2)		Changes in the rate are calculated by taking changes in the average interest rate multiplied by the prior period’s average balance.

(3)		Changes in rate/volume (“mix”) are calculated by taking changes in rates times the changes in volume.

Net Interest Margin by Segment

The following tables summarize net interest margin by segment for the periods indicated (dollars in millions):


	Three Months Ended
	September 30, 2007							September 30, 2006							June 30, 2007
	Average		Net		Net			Average		Net		Net			Average		Net		Net
	Earning		Interest		Interest			Earning		Interest		Interest			Earning		Interest		Interest
	Assets		Income		Margin			Assets		Income		Margin			Assets		Income		Margin

By Segment:
Thrift segment and other	$	17,103	$	103		2.39	%	$	15,709	$	99		2.50	%	$	16,621	$	95		2.29	%
Mortgage banking segment		14,592		39		1.06	%		9,798		38		1.53	%		14,634		54		1.49	%

Total Company	$	31,695	$	142		1.78	%	$	25,507	$	137		2.13	%	$	31,255	$	149		1.92	%


	Nine Months Ended
	September 30, 2007							September 30, 2006
	Average		Net		Net			Average		Net		Net
	Earning		Interest		Interest			Earning		Interest		Interest
	Assets		Income		Margin			Assets		Income		Margin

By Segment:
Thrift segment and other	$	17,029	$	288		2.26	%	$	15,201	$	279		2.45	%
Mortgage banking segment		14,300		138		1.29	%		9,533		115		1.62	%

Total Company	$	31,329	$	426		1.82	%	$	24,734	$	394		2.13	%

The net interest margin during the third quarter of 2007 was 1.78%, down from 2.13% for the third quarter of 2006 and 1.92% for the second quarter of 2007. Thrift net interest margin of 2.37% for the third quarter of 2007 also declined from 2.50% for the third quarter of 2006 but improved from 2.29% for the second quarter of 2007. The decline in net interest margin is mainly driven by increased non-performing loans in both the HFS and HFI portfolios.

Loans Held for Sale and Pipeline Hedging

We hedge the interest rate risk inherent in our pipeline of mortgage loans held for sale to protect our margin on sale of loans. We focus on trying to maintain stable profit margins with an emphasis on forecasting expected fallout to more precisely estimate our required hedge coverage ratio and minimize hedge costs. By closely monitoring key factors, such as product type, origination channels, progress or “status” of transactions, as well as changes in market interest rates since we committed a rate to the borrower (“rate lock commitments”), we seek to quantify the optional component of each rate lock, and in turn, the aggregate rate lock pipeline. By accurately evaluating these factors, we can minimize the cost of hedging and also stabilize gain on sale margins over different rate environments.

We also attempt to hedge the type of spread widening caused by the secondary market disruptions started in the first quarter of 2007. However, given the current uncertainties and resulting volatility in the secondary market, our hedging activities may not be effective. When spread widening does occur, we increase our loan pricing to attain our target MBR margins on future production.

In addition to mortgage loans held for sale, the hedging activities also include rate lock commitments. Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives pursuant to SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities,”(“SFAS 133”). The rate lock commitments are initially valued at zero and continue to be adjusted for changes in value resulting from changes in market interest rates, pursuant to the Staff Accounting Bulletin No. 105,“Application of Accounting Principles to Loan Commitments.”We economically hedge the risk of changes in fair value of rate lock commitments by selling forward contracts on securities of Fannie Mae or Freddie Mac, Eurodollar futures and other hedge instruments as we deem appropriate to prudently manage this risk. These forward and futures contracts are also accounted for as derivatives and recorded at fair value.

The following table summarizes the effect that hedging for interest rate risk management had on our gross mortgage banking revenue margin for the periods indicated:


	Three Months Ended															Nine Months Ended
	September 30,			September 30,			Percent			June 30,			Percent			September 30,			September 30,			Percent
	2007			2006			Change			2007			Change			2007			2006			Change

Gross MBR margin		0.75	%		1.16	%		(35	)%		0.91	%		(18	)%		0.96	%		1.52	%		(37	)%
MBR margin after hedging(1)		0.48	%		1.32	%		(64	)%		1.31	%		(63	)%		1.04	%		1.47	%		(29	)%


(1)		Before credit costs and SFAS 91 deferred costs.

Hedging Interest Rate Risk on Servicing-Related Assets

We are exposed to interest rate risk with respect to the investment in servicing-related assets. The mortgage servicing division is responsible for the management of interest rate and prepayment risks in the servicing-related assets, subject to policies and procedures established by, and oversight from, our management-level Interest Rate Risk Committee (“IRRC”), Asset and Liability Valuation Committee (“ALVC”) and ERM group, and our Board of Directors-level ERM Committee.

The objective of our hedging strategy is to maintain stable returns in all interest rate environments and not to speculate on interest rates. As such, we manage the comprehensive interest rate risk of our servicing-related assets using various financial instruments. Historically, we have hedged servicing-related assets using a variety of derivative instruments and on-balance sheet securities. As there are no hedge instruments that would be perfectly correlated with these hedged assets, we use a mix of the instruments designed to correlate well with the hedged servicing assets.

In addition to the hedging gain (loss) on MSRs, we also use other hedging strategies to manage our economic risks associated with MSRs. A summary of the performance on MSRs, including AAA-rated and agency interest-only securities, and hedges for the respective periods follows (dollars in thousands):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

Valuation adjustment due to market changes and external benchmarking	$	7,421		$	(134,070	)	$	222,659		$	260,920		$	10,794
Gain (loss) on financial instruments used to hedge MSRs		123,180			119,024			(213,213	)		(118,781	)		(27,265	)
Hedge gain (loss) on AAA-rated and agency interest-only securities		8,820			4,667			(14,741	)		(6,356	)		(8,965	)
Unrealized gain (loss) on AAA-rated and agency interest-only securities		(4,712	)		(8,629	)		10,465			7,235			4,138
Unrealized gain (loss) on principal-only securities		(146	)		5,008			(4,916	)		(4,761	)		(1,500	)
Unrealized gain (loss) on prepayment penalty securities		(7,666	)		13,250			(21,658	)		(31,528	)		17,907

Net gain (loss) on MSRs, AAA-rated and agency interest-only securities, and hedges	$	126,897		$	(750	)	$	(21,404	)	$	106,729		$	(4,891	)

The above gains and losses include costs inherent in transacting and holding the hedge instruments. If these assets were perfectly hedged, a net loss would have been reported representing these costs. In the third quarter of 2007, our MSRs and related hedges had a strong quarter. Hedges on the servicing-related assets had a net gain of

$126.9 million as they benefited from the decline in market interest rates. Moreover, our MSRs experienced a decline in value less than expected from the decline in interest rates as a result of slower prepayment rates than projected.

Value-At-Risk

We use avalue-at-risk (“VAR”) measure to monitor the interest rate risk on our assets. The measure incorporates a range of market factors that can impact the value of these assets and supplements other risk measures such as duration gap and stress testing. VAR estimates the potential loss over a specified period at a specified confidence level. We have chosen a historical approach that uses 500 days of market conditions along with current portfolio data to estimate the potentialone-day loss at a 95% confidence level. This means that actual losses are estimated to exceed the VAR measure about five times every 100 days.

In modeling the VAR, we have made a number of assumptions and approximations. As there is no standardized methodology for estimating VAR, different assumptions and approximations could result in materially different VAR estimates.

As of September 30, 2007, the combined portfolio of MSRs and interest-only securities (the “MSR/IO portfolio”) and the MBS portfolio were valued at $2.4 billion and $4.4 billion, respectively. The average VAR (after the effect of hedging transactions) for the quarter on the MSR/IO portfolio was $2.7 million, or 11 basis points of the recorded value, and the average VAR (after the effect of hedging transactions) for the quarter on the MBS portfolio was $1.2 million, or 3 basis points of the recorded value. During the quarter, the VAR measure ranged from $1.9 million to $3.9 million and from $0.8 million to $1.8 million for the MSR/IO and MBS portfolios, respectively.

Net Portfolio Value

In addition to our hedging activities to mitigate the interest rate risk in our pipeline of HFS loans, rate locks and our investment in servicing-related assets, we perform extensive, company-wide interest rate risk management. A primary measurement tool used to evaluate interest rate risk over the comprehensive balance sheet is net portfolio value (“NPV”) analysis. The NPV analysis and duration gap estimate the exposure of the fair value of net assets attributable to changes in interest rates.

The following sets forth the NPV and change in NPV that we estimate might result from a 100 basis point change in interest rates as of the dates indicated (dollars in thousands):


	September 30, 2007								December 31, 2006
			Effect of Change in								Effect of Change in
			Interest Rates								Interest Rates
			Decrease			Increase					Decrease			Increase
	Fair Value		100 bps			100 bps			Fair Value		100 bps			100 bps

Cash and cash equivalents	$	784,459	$	784,459		$	784,459		$	541,545	$	541,545		$	541,545
Trading securities		1,406,416		1,459,540			1,342,330			541,175		573,028			522,503
Available for sale securities		4,080,829		4,168,151			3,937,015			4,183,629		4,272,980			4,064,097
Loans held for sale		14,040,416		14,163,706			13,959,965			9,566,224		9,645,767			9,440,968
Loans held for investment		8,359,768		8,453,063			8,250,709			10,191,350		10,266,772			10,081,430
MSRs		2,489,611		1,927,163			2,852,581			1,822,455		1,393,979			2,142,276
Other assets		2,100,618		2,488,078			1,970,037			1,992,698		2,317,284			1,813,516

Total assets	$	33,262,117	$	33,444,160		$	33,097,096		$	28,839,076	$	29,011,355		$	28,606,335

Deposits	$	16,858,192	$	16,909,730		$	16,807,084		$	11,045,977	$	11,076,458		$	11,015,812
Advances from Federal Home Loan Bank		11,155,176		11,310,713			10,998,732			10,409,767		10,565,054			10,256,128
Other borrowings		1,505,093		1,505,718			1,504,469			3,464,290		3,466,577			3,462,006
Other liabilities		482,803		482,803			482,803			775,455		775,455			775,455

Total liabilities		30,001,264		30,208,964			29,793,088			25,695,489		25,883,544			25,509,401
Shareholders’ equity (NPV)	$	3,260,853	$	3,235,196		$	3,304,008		$	3,143,587	$	3,127,811		$	3,096,934

% Change from base case				(0.79	)%		1.32	%				(0.50	)%		(1.48	)%

Our NPV model has been built to focus on the Bank alone as $273.6 million of assets at the Parent Company and its non-bank subsidiaries have little interest rate risk exposure.

The increase in the net present value of equity from December 31, 2006 to September 30, 2007 is partly due to: (i) an increase in our balance sheet; (ii) net proceeds of $491 million in perpetual preferred stock issued by the Bank; (iii) a capital contribution of $200.0 million from the Parent Company to the Bank; and offset by (iv) a dividend payment of $186.2 million from the Bank to the Parent Company. This analysis is based on an instantaneous change in interest rates and does not reflect the impact of changes in hedging activities as interest rates change nor changes in volumes and profits from our mortgage banking operations that would be expected to result from the interest rate environment.

In conjunction with the NPV analysis, we also estimate the net sensitivity of the fair value of our financial instruments to movements in interest rates using duration gap. This calculation is performed by estimating the change in dollar value due to an instantaneous parallel change in the interest rate curve. The resulting change in dollar value per one basis point change in interest rates is used to estimate the sensitivity of our portfolio. The dollar values per one basis point change are then aggregated to estimate the portfolio’s net sensitivity. To calculate duration gap, the net sensitivity is divided by the fair value of total interest-earning assets and expressed in months. A duration gap of zero implies that the change in value of assets from an instantaneous rate move will be accompanied by an equal and offsetting move in the value of debt and derivatives, thus leaving the net fair value of equity unchanged.

The assumptions inherent in our interest rate shock models include expected valuation changes in an instantaneous and parallel interest rate shock and assumptions as to the degree of correlation between the hedges and hedged assets and liabilities. These assumptions may not adequately reflect factors such as the spread-widening or spread-tightening risk among the changes in rates on Treasury securities, the LIBOR/swap curve, mortgages, changes in the shape of the yield curve and volatility. In addition, the sensitivity analysis described in the prior paragraph is limited by the fact that it is performed at a particular point in time and does not incorporate other factors that would impact our financial performance in these scenarios, such as increases in income associated with the

increase in production volume that could result from a decrease in interest rates. Consequently, the preceding estimates should not be viewed as a forecast, and it is reasonable to expect that actual results could vary significantly from the analyses discussed above.

At September 30, 2007, net duration gap for our mortgage banking and thrift segments was 0.1 month and 0.9 month, respectively, with the overall net duration gap of 0.6 month. Fair value gains and losses will generally occur as market conditions change. We actively manage duration risk through asset selection by appropriate funding and hedging to within the duration limits approved by senior management and the Board of Directors. The duration gap measures are estimated on a daily basis for the mortgage servicing rights and on a monthly basis for the assets in our thrift portfolio and pipeline.

EXPENSES

A summary of non-interest expense follows for the periods indicated (dollars in thousands):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

Salaries and related	$	219,146		$	177,564		$	180,234		$	581,854		$	509,402
Premises and equipment		27,799			19,955			24,961			77,057			57,039
Loan purchase and servicing costs		14,127			14,246			14,057			43,210			40,301
Professional services		10,034			8,263			8,853			28,751			24,529
Data processing		20,002			16,831			20,331			60,089			46,864
Office and related		14,589			17,423			16,977			47,693			50,120
Advertising and promotion		8,804			10,742			9,659			28,098			34,368
Operations and sale of foreclosed assets		10,640			557			4,291			17,111			1,484
Other		7,285			3,315			5,920			18,242			9,640
Deferral of expenses under SFAS 91		(62,728	)		(66,198	)		(61,258	)		(192,632	)		(195,599	)

Total operating expenses		269,698			202,698			224,025			709,473			578,148
Amortization of other intangible assets		430			430			430			1,290			694

Total non-interest expense	$	270,128		$	203,128		$	224,455		$	710,763		$	578,842

Our operating expenses increased to 269.7 million for the third quarter of 2007, up 33% from $202.7 million for the third quarter of 2006 and 20% from $224.0 million for the second quarter of 2007. Included in the salaries and related expenses for the second quarter of 2007 is a one-time curtailment gain of $10.3 million recognized as a result of the previously disclosed pension plan freeze. Without the curtailment gain, the increase in operating expenses from the second quarter of 2007 would have been 15%.

The increase in expenses this quarter was driven mainly by the approximately $28 million in severance-related charges that were recorded this quarter as a result of the right-sizing of our workforce. We have executed on plans to reduce our workforce by roughly 1,500 positions, or 15%, through both the voluntary resignation with severance program and targeted involuntary layoffs for regular employees and reductions in our offshore and temporary workforce. In addition, we continued our investments in retail channel and commercial mortgage division, with the bulk of the increase coming from the April 1, 2007 acquisition of the retail lending platform of NYMC, including roughly 400 employees, and the hiring of over 1,400 retail lending professionals who were former employees of failed mortgage companies. As a result, expenses for these two businesses increased $20.7 million and $5.3 million from the third quarter of 2006 and second quarter of 2007, respectively.

Overall, our average FTE employees increased to 9,890 including 952 FTE off-shore as part of our Global Resources program for the three months ended September 30, 2007, up 21% from 8,186 for the third quarter of 2006 and 5% from 9,431 for the second quarter of 2007. We utilize the off-shore workforce predominantly in non-

customer-facing back office functions to enhance service levels and improve efficiencies. At September 30, 2007, our workforce is comprised of 82% in revenue generating positions and 18% in revenue supporting and non-revenue generating positions.

REO related expenses increased significantly to $10.6 million in the third quarter of 2007 from $557 thousand in the same period last year and $4.3 million for the second quarter of 2007. This is primarily driven by $7.9 million of further write-downs on REOs resulting from a rapid decline in their values. Worsened delinquencies in our portfolio also increased our foreclosure related expenses.

PROSPECTIVE TRENDS AND FUTURE OUTLOOK

It remains extremely difficult to provide an earnings forecast for the fourth quarter of 2007 and into 2008 given continued uncertainties about the length and depth of the downturn in the housing and mortgage markets and the abrupt and significant change we have made in our production model in becoming a GSE lender. However, we do believe we will see significant improvement in the fourth quarter in credit costs and losses from spread widening, given the large reserves we established this quarter and because the new loans we are now originating are predominantly those eligible for sale to the GSEs, whereas the vast majority of the loans causing the losses in the third quarter of 2007 are in loan types that have been cut from our guidelines. In addition, we are rapidly making the transition from being primarily anAlt-A lender to being a GSE lender, and we are seeing our mortgage production volumes pick up. We expect that our new, more GSE-oriented mortgage production business will be profitable in the fourth quarter of 2007, excluding credit costs from discontinued products andstart-up costs from our retail lending initiative. We expect that retail lending will be profitable in the first quarter of 2008.

Looking ahead to the fourth quarter of 2007 and 2008, given current industry conditions, a continued elevated level of credit costs from discontinued products and uncertain loan volumes and margins under our new production model, Indymac could be modestly profitable, or we could struggle and have additional losses, although we believe any quarterly losses would likely be substantially lower than the loss in the third quarter of 2007. The bottom line is that we have strong capital, reserves and liquidity to see us through this industry downturn. We remain confident that our long-term returns on capital will be at or above 15% once this current down cycle ends.

This “Future Outlook” section contains certain forward-looking statements. See the section of thisForm 10-Q entitled “Forward-Looking Statements” for a description of factors which may cause our actual results to differ from those anticipated.

OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of our business, we engage in financial transactions that are not recorded on our balance sheet. These transactions are structured to manage our interest rate, credit or liquidity risks, to diversify funding sources or to optimize our capital usage.

Substantially all of our off-balance sheet arrangements relate to the securitization of mortgage loans. Our mortgage loan securitizations are normally structured as sales in accordance with SFAS 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” which involves the transfer of the mortgage loans to “qualifying special-purpose entities” that are not subject to consolidation. In a securitization, an entity transferring the assets is able to convert those assets into cash. Special-purpose entities used in such securitizations obtain cash to acquire the assets by issuing securities to investors. We also, generally, have the right to repurchase mortgage loans from the special-purpose entities if the remaining outstanding balance of the mortgage loans falls to a level where the cost of servicing the loans exceeds the revenues we earn.

In connection with our loan sales that are securitization transactions, there are $76.4 billion in loans owned by off-balance sheet trusts as of September 30, 2007. The trusts have issued bonds secured by these loans. We have no obligation to provide funding support to either the third-party investors or the off-balance sheet trusts. Generally, neither the third-party investors nor the trusts have recourse to our assets or us, and they have no ability to require us to repurchase their loans other than for non-credit-related recourse that can arise under standard representations and warranties. We maintain secondary market reserves mostly for losses that could arise in connection with loans that we are required to repurchase from GSEs, whole loan sales and securitizations. For information on the sales

proceeds and cash flows from our securitizations for 2007, see “Liquidity — Principal Sources of Cash — Loan Sales and Securitizations.”

We often retain certain interests, which may include subordinated classes of securities, MSRs, AAA-rated and agency interest-only securities, prepayment penalty and residual securities in the securitization trust. The performance of the loans in the trusts will impact our ability to realize the current estimated fair value of these assets that are included on our balance sheet. See discussions on MSRs under “Mortgage Servicing Division” and “Mortgage-Backed Securities Division” on page 20 and 25, respectively.

Management does not believe that any of its off-balance sheet arrangements have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

AGGREGATE CONTRACTUAL OBLIGATIONS

Our material contractual obligations were summarized and included in our 200610-K. There have been no material changes outside the ordinary course of our business in the contractual obligations as specified in our 200610-K during the nine months ended September 30, 2007.

CRITICAL ACCOUNTING POLICIES AND JUDGMENTS

Several of the critical accounting policies that are very important to the portrayal of our financial condition and results of operations require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due to the impact of changing market conditionsand/or consumer behavior. We believe our most critical accounting policies relate to: (1) assets that are highly dependent on internal valuation models and assumptions rather than market quotations, including, HFS loans, AAA-rated and agency interest-only securities, prepayment penalty securities, MSRs and non-investment grade and residual securities; (2) derivatives hedging instruments and hedge accounting; (3) our allowance for loan losses; and (4) our secondary market reserve. Refer to pages 80 to 85 of our 200610-K for further discussion of our critical accounting policies and judgments.

Management discusses these critical accounting policies and related judgments with Indymac’s Audit Committee and external auditors on a quarterly basis. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

OTHER CONSIDERATIONS

Under OTS regulations, limitations have been imposed on all capital distributions, including cash dividends. Indymac Bancorp, as the holding company for the Bank, is substantially dependent upon dividends from the Bank for cash used to pay dividends on common stock and other cash outflows. We are required to seek approval from the OTS in order to pay dividends from the Bank to the Parent Company. There is no assurance that the Bank will be able to pay such dividends in the future or that the OTS will continue to grant approvals. While the holding company maintains cash and an unsecured line of credit to manage its liquidity, a disruption in dividends from the Bank could cause the holding company to reduce or eliminate the dividends paid on common stock.

For holders of the Bank’s Perpetual Non-Cumulative Fixed Rate Preferred Stock (“Series A Preferred Stock”) and Indymac Bancorp’s common stock, dividends we pay will be treated as dividends for U.S. federal income tax purposes only to the extent paid out of our current or accumulated “earnings and profits” as measured by federal and state tax law. Any dividend that we pay at a time when we do not have any current or accumulated earnings and profits will not be taxable as a dividend for U.S. federal income tax purposes, and instead will be treated first as a return of capital, reducing a holder’s basis in its stock to the extent of such basis, and thereafter as capital gain. Any dividends we pay that are not treated as dividends will not be eligible for the dividends-received deduction or the reduced rates of taxation available for certain holders subject to U.S. federal income tax.

APPENDIX A: ADDITIONAL QUANTITATIVE DISCLOSURES

We believe that the information provided in the body of this10-Q provides a good overview of the Company’s business and its results for the third quarter of 2007. However, we are including the following tables for a more detailed analysis of our operations.

TABLE OF CONTENTS


Table			Page

	1	Product Profitability Analysis		56
	2	S&P Lifetime Loss Estimates		62
	3	Production by Product — FICO and CLTV		62
	4	SFR Mortgage Loan Production and Pipeline by Purpose		63
	5	SFR Mortgage Loan Production by Amortization Type		63
	6	SFR Mortgage Loan Production by Geographic Distribution		64
	7	MBR Margin		64
	8	Servicing Fee Income		64
	9	Mortgage Servicing Rights Rollforward		65
	10	Gain (Loss) on Mortgage-Backed Securities		66
	11	Unrealized Gains and Losses of Securities Available for Sale		66
	12	Mortgage-Backed Securities by Credit Rating		68
	13	Other Retained Assets		68
	14	Valuation of MSRs, Interest-Only, Prepayment Penalty, and Residual Securities		70
	15	Deposits by Channel and Product		71

TABLE 1. PRODUCT PROFITABILITY ANALYSIS

As part of our process of measuring results and holding managers responsible for specific targets, we evaluate profitability at the product level in addition to our segment results. We currently have four product groups: standard consumer home loans held for sale, specialty consumer home loans held for saleand/or investment, home loans and related investment, and specialty commercial loans held for investment. Please refer to our 200610-K, pages 29 to 30, for further discussion on the products included within each product group.

The following tables summarize the profitability for each of the four product groups, treasury, and overhead for the periods indicated (dollars in thousands):


							Home
	Standard			Specialty			Loans &			Specialty
	Consumer			Consumer			Related			Commercial									Total
	Home Loans			Home Loans			Investments			Loans			Treasury			Overhead			Company

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	41,234		$	45,187		$	31,461		$	16,732		$	1,336		$	6,228		$	142,178
Provision for loan losses		—			(6,852	)		(12,000	)		(79,427	)		—			—			(98,279	)
Gain (loss) on sale of loans		(150,854	)		(96,628	)		(3,241	)		(203	)		—			(193	)		(251,119	)
Service fee income (expense)		—			22,780			189,646			3			—			500			212,929
Gain (loss) on MBS		—			(57,671	)		(35,998	)		—			—			—			(93,669	)
Gain on sale and leaseback of building		—			—			—			—			—			23,982			23,982
Other income (expense)		6,966			9,457			2,388			906			237			1,638			21,592

Net revenue (expense)		(102,654	)		(83,727	)		172,256			(61,989	)		1,573			32,155			(42,386	)
Variable expenses		71,523			33,478			6,432			2,901			—			—			114,334
Severance charges		—			—			—			—			—			27,634			27,634
Deferral of expenses under SFAS 91		(46,088	)		(12,376	)		(2,457	)		(1,807	)		—			—			(62,728	)
Fixed expenses		60,310			25,174			22,736			7,258			3,568			71,842			190,888

Pre-tax earnings (loss)		(188,399	)		(130,003	)		145,545			(70,341	)		(1,995	)		(67,321	)		(312,514	)
Minority interests		—			—			—			—			—			12,396			12,396

Net earnings (loss)	$	(114,735	)	$	(79,202	)	$	88,638		$	(42,838	)	$	(1,215	)	$	(53,365	)	$	(202,717	)

Balance Sheet Data
Average interest-earning assets	$	11,532,933		$	6,076,629		$	11,783,953		$	1,738,414		$	—		$	562,629		$	31,694,558
Allocated capital	$	555,858		$	443,265		$	825,952		$	144,617		$	—		$	84,689		$	2,054,381
Performance Ratios
ROE		(82	)%		(71	)%		43	%		(118	)%		N/A			N/A			(39	)%
Net interest margin		1.42	%		2.95	%		1.06	%		3.82	%		N/A			N/A			1.78	%
MBR margin		(0.91	)%		(12.12	)%		(0.32	)%		N/A			N/A			N/A			(1.54	)%
Efficiency ratio		(84	)%		(60	)%		14	%		48	%		N/A			N/A			483	%
Operating Data
Loan production	$	12,796,864		$	3,027,703		$	954,343		$	282,788		$	—		$	—		$	17,061,698
Loans sold	$	11,302,561		$	701,916		$	1,004,070		$	—		$	—		$	—		$	13,008,547
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	30,746		$	38,672		$	44,141		$	20,768		$	18		$	2,366		$	136,711
Provision for loan losses		—			(566	)		(2,000	)		(2,422	)		—			—			(4,988	)
Gain (loss) on sale of loans		87,979			62,106			10,140			—			—			—			160,225
Service fee income (expense)		—			6,965			13,572			—			—			521			21,058
Gain (loss) on MBS		—			(3,945	)		22,913			—			—			—			18,968
Other income (expense)		—			8,379			1,760			2,332			150			979			13,600

Net revenue (expense)		118,725			111,611			90,526			20,678			168			3,866			345,574
Variable expenses		57,213			42,428			4,098			2,225			—			—			105,964
Deferral of expenses under SFAS 91		(44,393	)		(18,371	)		(1,538	)		(1,896	)		—			—			(66,198	)
Fixed expenses		48,004			25,262			14,013			5,173			2,227			68,683			163,362

Pre-tax earnings (loss)		57,901			62,292			73,953			15,176			(2,059	)		(64,817	)		142,446

Net earnings (loss)	$	35,262		$	37,782		$	45,038		$	9,243		$	(1,254	)	$	(39,891	)	$	86,180

Balance Sheet Data
Average interest-earning assets	$	7,762,761		$	5,737,934		$	10,237,788		$	1,498,138		$	—		$	270,396		$	25,507,017
Allocated capital	$	346,735		$	386,649		$	641,818		$	138,726		$	—		$	357,451		$	1,871,379
Performance Ratios
ROE		40	%		39	%		28	%		27	%		N/A			N/A			18	%
Net interest margin		1.57	%		2.67	%		1.71	%		5.50	%		N/A			N/A			2.13	%
MBR margin		0.76	%		2.27	%		1.55	%		N/A			N/A			N/A			1.03	%
Efficiency ratio		51	%		44	%		18	%		24	%		N/A			N/A			58	%
Operating Data
Loan production	$	19,032,639		$	4,278,249		$	606,713		$	521,575		$	—		$	—		$	24,439,176
Loans sold	$	15,612,563		$	3,241,590		$	654,023		$	—		$	—		$	—		$	19,508,176

The following tables provide details on the profitability for the standard consumer home loans held for sale for the periods indicated (dollars in thousands):


	Standard Consumer Home Loans Held for Sale
	Prime			Subprime			Total

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	40,020		$	1,214		$	41,234
Provision for loan losses		—			—			—
Gain (loss) on sale of loans		(127,927	)		(22,927	)		(150,854	)
Service fee income (expense)		—			—			—
Gain (loss) on MBS		—			—			—
Other income (expense)		6,651			315			6,966

Net revenues (expense)		(81,256	)		(21,398	)		(102,654	)
Variable expenses		65,597			5,926			71,523
Deferral of expenses under SFAS 91		(42,270	)		(3,818	)		(46,088	)
Fixed expenses		55,434			4,876			60,310

Pre-tax earnings (loss)		(160,017	)		(28,382	)		(188,399	)

Net earnings (loss)	$	(97,450	)	$	(17,285	)	$	(114,735	)

Balance Sheet Data
Average interest-earning assets	$	11,372,088		$	160,845		$	11,532,933
Allocated capital	$	546,082		$	9,776		$	555,858
Performance Ratios
ROE		(71	)%		(701	)%		(82	)%
Net interest margin		1.40	%		2.99	%		1.42	%
MBR margin		(0.74	)%		(7.67	)%		(0.91	)%
Efficiency ratio		(97	)%		(33	)%		(84	)%
Operating Data
Loan production	$	12,217,605		$	579,259		$	12,796,864
Loans sold	$	11,023,703		$	278,858		$	11,302,561
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	28,035		$	2,711		$	30,746
Provision for loan losses		—			—			—
Gain (loss) on sale of loans		82,833			5,146			87,979
Service fee income (expense)		—			—			—
Gain (loss) on MBS		—			—			—
Other income (expense)		—			—			—

Net revenues (expense)		110,868			7,857			118,725
Variable expenses		49,834			7,379			57,213
Deferral of expenses under SFAS 91		(38,667	)		(5,726	)		(44,393	)
Fixed expenses		43,552			4,452			48,004

Pre-tax income (loss)		56,149			1,752			57,901

Net income (loss)	$	34,195		$	1,067		$	35,262

Balance Sheet Data
Average interest-earning assets	$	7,331,198		$	431,563		$	7,762,761
Allocated capital	$	320,562		$	26,173		$	346,735
Performance Ratios
ROE		42	%		16	%		40	%
Net interest margin		1.52	%		2.49	%		1.57	%
MBR margin		0.74	%		1.28	%		0.76	%
Efficiency ratio		49	%		78	%		51	%
Operating Data
Loan production	$	18,321,539		$	711,100		$	19,032,639
Loans sold	$	14,997,083		$	615,480		$	15,612,563

The following tables provide details on the profitability for the specialty consumer home loans held for saleand/or investment for the periods indicated (dollars in thousands):


	Specialty Consumer Home Loans Held for Sale and/or Investment
	HELOCs/			Reverse						Discontinued
	Seconds			Mortgages			CTP/Lot			Products			Total

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	23,936		$	4,644		$	16,186		$	421		$	45,187
Provision for loan losses		(800	)		—			(5,602	)		(450	)		(6,852	)
Gain (loss) on sale of loans		(118,550	)		14,314			7,608			—			(96,628	)
Service fee income (expense)		11,027			11,753			—			—			22,780
Gain (loss) on MBS		(57,368	)		—			(303	)		—			(57,671	)
Other income (expense)		3,576			11			5,870			—			9,457

Net revenues (expense)		(138,179	)		30,722			23,759			(29	)		(83,727	)
Variable expenses		4,691			18,900			9,887			—			33,478
Deferral of expenses under SFAS 91		(3,377	)		(6,214	)		(2,785	)		—			(12,376	)
Fixed expenses		4,007			13,329			7,773			65			25,174

Pre-tax earnings (loss)		(143,500	)		4,707			8,884			(94	)		(130,003	)

Net earnings (loss)	$	(87,391	)	$	2,836		$	5,410		$	(57	)	$	(79,202	)

Balance Sheet Data
Average interest-earning assets	$	2,347,847		$	962,847		$	2,735,094		$	30,841		$	6,076,629
Allocated capital	$	253,384		$	55,770		$	131,340		$	2,771		$	443,265
Performance Ratios
ROE		(137	)%		20	%		16	%		(8	)%		(71	)%
Net interest margin		4.04	%		1.91	%		2.35	%		5.42	%		2.95	%
MBR margin		(65.47	)%		16.14	%		1.84	%		N/A			(12.12	)%
Efficiency ratio		(4	)%		85	%		51	%		15	%		(60	)%
Operating Data
Loan production	$	634,634		$	1,079,592		$	1,313,477		$	—		$	3,027,703
Loans sold	$	170,481		$	117,461		$	413,974		$	—		$	701,916
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	23,771		$	2,868		$	11,524		$	509		$	38,672
Provision for loan losses		—			—			(516	)		(50	)		(566	)
Gain (loss) on sale of loans		3,885			45,548			12,673			—			62,106
Service fee income (expense)		1,366			5,599			—			—			6,965
Gain (loss) on MBS		(3,898	)		—			(47	)		—			(3,945	)
Other income (expense)		2,700			187			5,492			—			8,379

Net revenues (expense)		27,824			54,202			29,126			459			111,611
Variable expenses		13,444			20,319			8,665			—			42,428
Deferral of expenses under SFAS 91		(8,544	)		(7,592	)		(2,235	)		—			(18,371	)
Fixed expenses		2,964			14,486			7,735			77			25,262

Pre-tax earnings (loss)		19,960			26,989			14,961			382			62,292

Net earnings (loss)	$	12,156		$	16,282		$	9,111		$	233		$	37,782

Balance Sheet Data
Average interest-earning assets	$	2,589,343		$	801,629		$	2,307,726		$	39,236		$	5,737,934
Allocated capital	$	237,260		$	34,404		$	111,441		$	3,544		$	386,649
Performance Ratios
ROE		20	%		188	%		32	%		26	%		39	%
Net interest margin		3.64	%		1.42	%		1.98	%		5.15	%		2.67	%
MBR margin		0.83	%		4.52	%		1.96	%		N/A			2.27	%
Efficiency ratio		28	%		50	%		48	%		15	%		44	%
Operating Data
Loan production	$	1,839,049		$	1,128,203		$	1,310,997		$	—		$	4,278,249
Loans sold	$	1,523,333		$	1,071,652		$	646,605		$	—		$	3,241,590

The following tables provide details on the profitability for the home loans and related investments and the loan servicing operations for the periods indicated (dollars in thousands):


	Home Loans and Related Investments
	Retained Servicing						SFR Loans
	and Retention						Held for
	Activities			MBS			Investment			Total

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	146		$	19,199	��	$	12,116		$	31,461
Provision for loan losses		—			—			(12,000	)		(12,000	)
Gain (loss) on sale of loans		2,543			—			(5,784	)		(3,241	)
Service fee income (expense)		189,646			—			—			189,646
Gain (loss) on MBS		(4,959	)		(31,039	)		—			(35,998	)
Other income (expense)		1,845			—			543			2,388

Net revenues (expense)		189,221			(11,840	)		(5,125	)		172,256
Variable expenses		6,432			—			—			6,432
Deferral of expenses under SFAS 91		(2,457	)		—			—			(2,457	)
Fixed expenses		17,186			901			4,649			22,736

Pre-tax earnings (loss)		168,060			(12,741	)		(9,774	)		145,545

Net earnings (loss)	$	102,349		$	(7,759	)	$	(5,952	)	$	88,638

Balance Sheet Data
Average interest-earning assets	$	1,479,652		$	4,870,947		$	5,433,354		$	11,783,953
Allocated capital	$	391,005		$	236,824		$	198,123		$	825,952
Performance Ratios
ROE		104	%		(13	)%		(12	)%		43	%
Net interest margin		0.04	%		1.56	%		0.88	%		1.06	%
MBR margin		0.38	%		N/A			N/A			(0.32	)%
Efficiency ratio		11	%		(8	)%		68	%		14	%
Operating Data
Loan production	$	954,343		$	—		$	—		$	954,343
Loans sold	$	674,074		$	—		$	329,996		$	1,004,070
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	2,945		$	19,276		$	21,920		$	44,141
Provision for loan losses		—			—			(2,000	)		(2,000	)
Gain (loss) on sale of loans		9,392			—			748			10,140
Service fee income (expense)		13,572			—			—			13,572
Gain (loss) on MBS		17,283			5,630			—			22,913
Other income (expense)		1,345			(14	)		429			1,760

Net revenues (expense)		44,537			24,892			21,097			90,526
Variable expenses		4,098			—			—			4,098
Deferral of expenses under SFAS 91		(1,538	)		—			—			(1,538	)
Fixed expenses		11,675			973			1,365			14,013

Pre-tax earnings (loss)		30,302			23,919			19,732			73,953

Net earnings (loss)	$	18,454		$	14,567		$	12,017		$	45,038

Balance Sheet Data
Average interest-earning assets	$	559,843		$	3,845,961		$	5,831,984		$	10,237,788
Allocated capital	$	228,070		$	193,709		$	220,039		$	641,818
Performance Ratios
ROE		32	%		30	%		22	%		28	%
Net interest margin		2.09	%		1.99	%		1.49	%		1.71	%
MBR margin		1.44	%		N/A			N/A			1.55	%
Efficiency ratio		32	%		4	%		6	%		18	%
Operating Data
Loan production	$	606,713		$	—		$	—		$	606,713
Loans sold	$	654,023		$	—		$	—		$	654,023

The following table provides details on the profitability for the specialty commercial loans held for investment for the periods indicated (dollars in thousands):


	Specialty Commercial Loans Held for Sale and/or Investment
							Warehouse			Commercial
	Single Spec			Subdivision			Lending			Lending			Total

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	2,555		$	12,754		$	1,321		$	102		$	16,732
Provision for loan losses		(1,148	)		(78,191	)		(88	)		—			(79,427	)
Gain (loss) on sale of loans		—			—			—			(203	)		(203	)
Service fee income (expense)		—			—			—			3			3
Gain (loss) on MBS		—			—			—			—			—
Other income (expense)		545			(204	)		375			190			906

Net revenues (expense)		1,952			(65,641	)		1,608			92			(61,989	)
Variable expenses		628			1,785			—			488			2,901
Deferral of expenses under SFAS 91		(77	)		(1,444	)		—			(286	)		(1,807	)
Fixed expenses		467			3,625			980			2,186			7,258

Pre-tax earnings (loss)		934			(69,607	)		628			(2,296	)		(70,341	)

Net earnings (loss)	$	569		$	(42,391	)	$	382		$	(1,398	)	$	(42,838	)

Balance Sheet Data
Average interest-earning assets	$	217,496		$	1,264,835		$	190,996		$	65,087		$	1,738,414
Allocated capital	$	19,456		$	104,399		$	15,211		$	5,551		$	144,617
Performance Ratios
ROE		12	%		(161	)%		10	%		(100	)%		(118	)%
Net interest margin		4.66	%		4.00	%		2.74	%		0.62	%		3.82	%
Efficiency ratio		33	%		32	%		58	%		N/A			48	%
Operating Data
Loan production	$	36,466		$	121,106		$	—		$	125,216		$	282,788
Loans sold	$	—		$	—		$	—		$	—		$	—
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	3,245		$	16,488		$	1,035		$	—		$	20,768
Provision for loan losses		(204	)		(2,200	)		(18	)		—			(2,422	)
Gain (loss) on sale of loans		—			—			—			—			—
Service fee income (expense)		—			—			—			—			—
Gain (loss) on MBS		—			—			—			—			—
Other income (expense)		1,163			703			466			—			2,332

Net revenues (expense)		4,204			14,991			1,483			—			20,678
Variable expenses		709			1,516			—			—			2,225
Deferral of expenses under SFAS 91		(86	)		(1,810	)		—			—			(1,896	)
Fixed expenses		581			3,395			1,134			63			5,173

Pre-tax earnings (loss)		3,000			11,890			349			(63	)		15,176

Net earnings (loss)	$	1,827		$	7,241		$	213		$	(38	)	$	9,243

Balance Sheet Data
Average interest-earning assets	$	250,289		$	1,112,338		$	135,511		$	—		$	1,498,138
Allocated capital	$	18,735		$	108,408		$	11,583		$	—		$	138,726
Performance Ratios
ROE		39	%		26	%		7	%		N/A			27	%
Net interest margin		5.14	%		5.88	%		3.03	%		N/A			5.50	%
Efficiency ratio		27	%		18	%		76	%		N/A			24	%
Operating Data
Loan production	$	50,425		$	471,150		$	—		$	—		$	521,575
Loans sold	$	—		$	—		$	—		$	—		$	—

The following table provides details on the overhead costs for the periods indicated (dollars in thousands):


				Mortgage
	Servicing			Banking			Deposit			Corporate(1)			Total Overhead

Three Months Ended September 30, 2007
Operating Results
Net interest income	$	(68	)	$	700		$	6,463		$	(867	)	$	6,228
Provision for loan losses		—			—			—			—			—
Gain (loss) on sale of loans		(189	)		(4	)		—			—			(193	)
Service fee income (expense)		—			—			—			500			500
Gain (loss) on MBS		—			—			—			—			—
Gain on sale and leaseback of building		—			—			—			23,982			23,982
Other income (expense)		579			176			1,152			(269	)		1,638

Net revenues (expense)		322			872			7,615			23,346			32,155
Variable expenses		—			—			—			—			—
Severance costs		—			—			—			27,634			27,634
Deferral of expenses under SFAS 91		—			—			—			—			—
Fixed expenses		6,375			12,579			13,777			39,111			71,842

Pre-tax earnings (loss)		(6,053	)		(11,707	)		(6,162	)		(43,399	)		(67,321	)
Minority interests		—			—			—			12,396			12,396

Net earnings (loss)	$	(3,686	)	$	(7,130	)	$	(3,753	)	$	(38,796	)	$	(53,365	)

Balance Sheet Data
Average interest-earning assets	$	—		$	2,109		$	171		$	560,349		$	562,629
Allocated capital	$	376		$	16,939		$	11,335		$	56,039		$	84,689
Performance Ratios
ROE		N/A			N/A			N/A			N/A			N/A
Net interest margin		N/A			N/A			N/A			N/A			N/A
Efficiency ratio		N/A			N/A			N/A			N/A			N/A
Operating Data
Loan production	$	—		$	—		$	—		$	—		$	—
Loans sold	$	—		$	—		$	—		$	—		$	—
Three Months Ended September 30, 2006
Operating Results
Net interest income	$	(115	)	$	(73	)	$	3,954		$	(1,400	)	$	2,366
Provision for loan losses		—			—			—			—			—
Gain (loss) on sale of loans		—			—			—			—			—
Service fee income (expense)		—			—			—			521			521
Gain (loss) on MBS		—			—			—			—			—
Other income (expense)		730			116			896			(763	)		979

Net revenues (expense)		615			43			4,850			(1,642	)		3,866
Variable expenses		—			—			—			—			—
Deferral of expenses under SFAS 91		—			—			—			—			—
Fixed expenses		5,104			10,263			11,127			42,189			68,683

Pre-tax earnings (loss)		(4,489	)		(10,220	)		(6,277	)		(43,831	)		(64,817	)

Net earnings (loss)	$	(2,734	)	$	(6,224	)	$	(3,823	)	$	(27,110	)	$	(39,891	)

Balance Sheet Data
Average interest-earning assets	$	—		$	41		$	172		$	270,183		$	270,396
Allocated capital	$	177		$	10,500		$	1,939		$	344,835		$	357,451
Performance Ratios
ROE		N/A			N/A			N/A			N/A			N/A
Net interest margin		N/A			N/A			N/A			N/A			N/A
Efficiency ratio		N/A			N/A			N/A			N/A			N/A
Operating Data
Loan production	$	—		$	—		$	—		$	—		$	—
Loans sold	$	—		$	—		$	—		$	—		$	—


(1)		Corporate overhead under the product profitability analysis is different from the corporate overhead under the business segment results as certain elimination items are included here.

TABLE 2. S&P LIFETIME LOSS ESTIMATES

One method we use to evaluate the credit quality of our production is the S&P Levels model. We believe this model provides another objective, third-party method to evaluate our production. The Levels model is the oldest licensed mortgage loss model in the industry, developed and tested over various economic cycles, and one of only two models accepted by the industry for evaluating securitizations. The loss estimates are shown to describe the relative level of credit risk in our loan production at the time of origination. Because we routinely sell the vast majority of loans produced, these estimates do not reflect the amount of credit risk retained by us.

The following summarizes the estimated lifetime losses for mortgage production using the S&P Levels model for the periods indicated (dollars in millions):


	Three Months Ended
	September 30,			September 30,			June 30,
	2007			2006			2007

Total S&P average lifetime loss estimates		0.49	%		0.87	%		0.63	%
Total S&P evaluated production(1)	$	14,228		$	20,092		$	19,287


(1)		While our production is evaluated using the S&P Levels model, the data is not audited or endorsed by S&P. S&P evaluated production excludes second liens, HELOCs, reverse mortgages, and construction loans.

Total estimated average lifetime loss rate for the third quarter of 2007 decreased 38 basis points and 14 basis points to 0.49% from 0.87% for the third quarter of 2006 and 0.63% for the second quarter of 2007. The year-over-year decrease was due to us substantially eliminating higher LTV ratio subprime loans and 80/20 piggyback loans from our product offerings through guideline cutbacks implemented earlier in the year.

TABLE 3. PRODUCTION BY PRODUCT — FICO AND CLTV

The following table shows the average FICO and CLTV by portfolio for loans originated during the periods indicated (dollars in millions):


	Three Months Ended
	September 30, 2007							September 30, 2006							June 30, 2007
	Production		FICO		CLTV			Production		FICO		CLTV			Production		FICO		CLTV

Total production	$	17,062		N/A		N/A		$	24,439		N/A		N/A		$	23,023		N/A		N/A
Less:
HELOCs(1)/Seconds		637		731		80	%		1,840		716		87	%		876		724		85	%
Reverse mortgages		1,080		N/A		58	%		1,128		N/A		53	%		1,258		N/A		57	%
Consumer construction(1)		871		728		75	%		908		722		76	%		1,084		724		74	%
Commercial real estate		125		N/A		66	%		—		N/A		—			45		N/A		67	%
Builder construction commitments(1)		121		N/A		77	%		471		N/A		74	%		473		N/A		70	%

Total S&P evaluated production	$	14,228		705		78	%	$	20,092		702		81	%	$	19,287		705		78	%


(1)		Amounts represent total commitments.

TABLE 4. SFR MORTGAGE LOAN PRODUCTION AND PIPELINE BY PURPOSE

The following table presents SFR mortgage loan production and pipeline by purpose as of and for the periods indicated (dollars in millions):


	As of and for the Three Months Ended
	September 30,			September 30,			Percent			June 30,			Percent
	2007			2006			Change			2007			Change

Production and Pipeline by Purpose:
SFR mortgage loan production:
Purchase transactions	$	5,889		$	9,682			(39	)%	$	7,285			(19	)%
Cash-out refinance transactions		7,389			10,656			(31	)%		10,577			(30	)%
Rate/term refinance transactions		3,538			3,630			(3	)%		4,643			(24	)%

Total SFR mortgage loan production	$	16,816		$	23,968			(30	)%	$	22,505			(25	)%

% purchase and cash-out refinance transactions		79	%		85	%					79	%
Mortgage industry market share		3.06	%		3.44	%		(11	)%		3.24	%		(6	)%
SFR mortgage loan pipeline at period end(1):
Purchase transactions	$	2,811		$	4,595			(39	)%	$	5,003			(44	)%
Cash-out refinance transactions		2,871			5,210			(45	)%		4,848			(41	)%
Rate/term refinance transactions		1,640			1,930			(15	)%		2,979			(45	)%

Total specific rate locks		7,322			11,735			(38	)%		12,830			(43	)%
Non-specific rate locks on bulk purchases		99			2,821			(96	)%		546			(82	)%

Total SFR mortgage loan pipeline	$	7,421		$	14,556			(49	)%	$	13,376			(45	)%


(1)		Total pipeline of loans in process includes rate lock commitments we have provided on loans that are specifically identified or non-specific bulk packages, and loan applications we have received for which the borrower has not yet locked in the interest rate commitment. Non-specific bulk packages represent pools of loans we have committed to purchase, where the pool characteristics are specified but the actual loans are not.

TABLE 5. SFR MORTGAGE LOAN PRODUCTION BY AMORTIZATION TYPE

The following table presents SFR mortgage loan production and pipeline by amortization type for the periods indicated:


	Three Months Ended
	September 30,			September 30,			June 30,
	2007			2006			2007

SFR Mortgage Production by Amortization Type:
Fixed-rate mortgages		25	%		20	%		24	%
Intermediate term fixed-rate loans		7	%		7	%		7	%
Interest-only loans		46	%		39	%		47	%
Pay option ARMs		8	%		23	%		11	%
Other ARMs		14	%		11	%		11	%

		100	%		100	%		100	%

TABLE 6. SFR MORTGAGE LOAN PRODUCTION BY GEOGRAPHIC DISTRIBUTION

The following table presents SFR mortgage loan production and pipeline by geographic distribution for the periods indicated:


	Three Months Ended
	September 30,			September 30,			June 30,
	2007			2006			2007

Geographic distribution:
California		41	%		45	%		45	%
Florida		8	%		8	%		8	%
New York		7	%		6	%		7	%
New Jersey		4	%		4	%		4	%
Washington		3	%		2	%		3	%
Other		37	%		35	%		33	%

Total		100	%		100	%		100	%

TABLE 7. MBR MARGIN

The following table shows a reconciliation of gross MBR margin to net MBR margin in basis points for the periods indicated (in basis points unless otherwise noted):


																			Production
													Secondary			Total			Credit			Net MBR
								MBR		Net HFS			Market			Production			Costs/MBR			After			FAS 91
	Loans		Gross		Pipeline			After		Credit			Reserve			Credit			After			Production			Deferred			Net MBR
	Sold		MBR		Hedging			Hedging(a)		Losses			Accrual			Costs(b)			Hedging (b/a)			Credit Costs			Cost			Reported
Quarter ended	(In millions)

September 30, 2007		13,009		75		(27	)		48		(149	)		(25	)		(174	)		360	%		(126	)		(28	)		(154	)
September 30, 2006		19,508		116		16			132		(3	)		(5	)		(8	)		6	%		124			(21	)		103
June 30, 2007		20,194		91		40			131		(18	)		(12	)		(30	)		23	%		101			(21	)		80

TABLE 8. SERVICING FEE INCOME

The components of service fee income for the Company are as follows for the periods indicated (dollars in thousands):


	Three Months Ended
	September 30,			BPS			September 30,			BPS			June 30,			UPB
	2007			UPB			2006			UPB			2007			BPS

Service fee income:
Gross service fee income	$	180,446			42		$	133,818			46		$	182,175			45
Change in value due to portfolio run-off		(98,118	)		(23	)		(97,714	)		(33	)		(106,003	)		(26	)

Service fee income, net of change in value due to portfolio run-off		82,328			19			36,104			13			76,172			19
Change in value due to application of external benchmarking policies		—			—			(599	)		—			3,920			1
Valuation adjustment due to market changes		7,421			2			(133,471	)		(46	)		218,739			54
Gain (loss) on financial instruments used to hedge MSRs		123,180			29			119,024			41			(213,213	)		(53	)

Total service fee income	$	212,929			50		$	21,058			8		$	85,618			21


	Nine Months Ended
	September 30,			BPS			September 30,			BPS
	2007			UPB			2006			UPB

Service fee income:
Gross service fee income	$	527,496			44		$	349,798			45
Change in value due to portfolio run-off		(321,902	)		(27	)		(254,133	)		(33	)

Service fee income, net of change in value due to portfolio run-off		205,594			17			95,665			12
Change in value due to application of external benchmarking policies		3,920			—			(16,459	)		(2	)
Valuation adjustment due to market changes		257,000			22			27,253			4
Loss on financial instruments used to hedge MSRs		(118,781	)		(10	)		(27,265	)		(4	)

Total service fee income	$	347,733			29		$	79,194			10

As a result of the growth in our servicing portfolio and slower run-off of the portfolio, servicing income before hedging activities saw increases in both the three months and nine months ended September 30, 2007, compared to the same periods last year. In addition, the financial instruments used to hedge MSRs also saw a gain of $123.1 million this quarter, compared to a loss of $213.2 million for the second quarter of 2007.

TABLE 9. MORTGAGE SERVICING RIGHTS ROLLFORWARD

The following table provides additional information on our activities in MSRs for the periods indicated (dollars in thousands):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

Balance at beginning of period	$	2,387,077		$	1,598,821		$	2,052,822		$	1,822,455		$	1,094,490
Cumulative-effect adjustment due to change in accounting for MSRs		—			—			—			—			17,561
Net additions from loan sale or securitization		191,885			258,249			272,260			783,808			756,821
Purchase or assumption		—			8,631			2,268			2,268			8,658
Transfers to prepayment penalty and/or AAA-rated and agency interest-only securities		—			(2,601	)		(56,040	)		(57,065	)		(2,601	)
Transfers due toclean-up calls and other		1,346			—			(889	)		(873	)		(274	)
Change in fair value due to run-off		(98,118	)		(97,714	)		(106,003	)		(321,902	)		(254,133	)
Change in fair value due to market changes		3,554			(133,471	)		218,739			253,133			27,253
Change in fair value due to application of external benchmarking policies		3,867			(599	)		3,920			7,787			(16,459	)

Balance at end of period	$	2,489,611		$	1,631,316		$	2,387,077		$	2,489,611		$	1,631,316

MSRs as basis points of unpaid principal balance		143			131			142			143			131

TABLE 10. GAIN (LOSS) ON MORTGAGE-BACKED SECURITIES

The components of the Company’s gain (loss) on MBS are as follows for the periods indicated (dollars in thousands):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,				September 30,			September 30,
	2007			2006			2007				2007			2006

Net gain (loss) on MBS:
Realized gain (loss) on available for sale securities	$	—		$	3,520		$	—			$	(486	)	$	3,520
Impairments on available for sale securities		(4,361	)		(3,782	)		—				(6,418	)		(5,718	)
Unrealized gain (loss) on prepayment penalty securities		(7,666	)		13,250			(21,658	)			(31,527	)		17,907
Unrealized gain (loss) on late fee securities		(675	)		—			582				(93	)		—
Unrealized gain (loss) on AAA-rated and agency interest-only securities		(5,221	)		(8,629	)		10,504				6,764			4,138
Unrealized gain (loss) on non-investment grade residual securities		(38,672	)		8,125			(12,088	)			(53,385	)		7,208
Net gain (loss) on trading securities and other instrument(1)		(37,074	)		6,484			(23,687	)			(60,217	)		(2,444	)

Total gain (loss) on MBS, net	$	(93,669	)	$	18,968		$	(46,347	)		$	(145,362	)	$	24,611


(1)		The amount for the three months ended September 30, 2007 includes $29.8 million of credit related losses on non-investment grade securities.

TABLE 11. UNREALIZED GAINS AND LOSSES OF SECURITIES AVAILABLE FOR SALE

The following table summarizes the unrealized gains and losses of securities available for sale as of the dates indicated (dollars in thousands):


	September 30,			September 30,			June 30,
	2007			2006			2007

Amortized cost	$	4,411,854		$	4,449,860		$	4,564,495
Gross unrealized holding gains		6,871			16,231			3,984
Gross unrealized holding losses		(94,325	)		(43,611	)		(68,572	)

Estimated fair value	$	4,324,400		$	4,422,480		$	4,499,907

The unrealized losses and fair value of securities that have been in a continuous unrealized loss position for less than 12 months and 12 months or greater were as follows (dollars in thousands):


	As of September 30, 2007
	Less Than 12 Months					12 Months or Greater					Total
	Unrealized					Unrealized					Unrealized
	Losses			Fair Value		Losses			Fair Value		Losses			Fair Value

Securities — available for sale:
AAA-rated non-agency securities	$	(16,947	)	$	1,279,753	$	(39,538	)	$	1,340,963	$	(56,485	)	$	2,620,716
AAA-rated agency securities		(964	)		30,905		(56	)		12,925		(1,020	)		43,830
Other investment grade securities		(35,990	)		404,060		(689	)		19,439		(36,679	)		423,499
Residual securities		(141	)		3,131		—			—		(141	)		3,131

Total securities — available for sale	$	(54,042	)	$	1,717,849	$	(40,283	)	$	1,373,327	$	(94,325	)	$	3,091,176

As of September 30, 2007, the available for sale securities that have been in unrealized loss position for 12 months or more are primarily related to AAA-rated securities issued by private institutions. These unrealized losses are primarily attributable to changes in interest rates. Because we have the ability and the intent to hold these investments until a recovery of fair value, which may be maturity, we do not consider these investments to be other-than-temporarily impaired at September 30, 2007.

TABLE 12. MORTGAGE-BACKED SECURITIES BY CREDIT RATING

The fair values of mortgage-backed securities by credit ratings follow as of the dates indicated (dollars in thousands):


										December 31,
	September 30, 2007									2006
	Current		Net Premium
	Face		(Discount) to			Amortized
	Value		Face Value			Cost		Fair Value		Fair Value

AAA-rated mortgage-backed securities:
AAA-rated non-agencies securities	$	3,940,397	$	27,389		$	3,967,786	$	3,915,650	$	4,648,446
AAA-rated agency securities		442,901		1,603			444,504		443,516		65,175
AAA-rated and agency interest-only securities		—		—			—		71,901		73,570
AAA-rated principal-only securities		—		—			—		72,488		38,478

Total AAA-rated mortgage-backed securities	$	4,383,298	$	28,992		$	4,412,290	$	4,503,555	$	4,825,669

Prepayment penalty and late fee securities								$	88,239	$	97,576

Other investment grade mortgage-backed securities:
AA+	$	13,807	$	(866	)	$	12,941	$	12,437	$	7,513
AA		417,485		(12,792	)		404,693		381,785		86,311
AA-		18,976		(741	)		18,235		16,506		14,138
A+		6,438		(190	)		6,248		5,836		—
A		170,782		(13,308	)		157,474		150,496		2,160
A-		13,650		(68	)		13,582		12,281		—
BBB+		1,810		(706	)		1,104		1,104		—
BBB		106,112		(17,667	)		88,445		86,062		20,734
BBB-		64,150		(7,522	)		56,628		57,649		58,397

Total other investment grade mortgage-backed securities	$	813,210	$	(53,860	)	$	759,350	$	724,156	$	189,253

Non-investment grade mortgage-backed securities:
BB+	$	37,072	$	(8,679	)	$	28,393	$	28,393	$	7,299
BB		154,972		(44,051	)		110,921		111,140		49,856
BB-		22,022		(2,393	)		19,629		19,629		21,170
B		66,368		(46,894	)		19,474		19,896		1,442
CCC+		5,042		(2,949	)		2,093		2,093		—
CCC		4,096		(2,497	)		1,599		1,599		—
C		5,705		(3,721	)		1,984		1,984		—
Other		49,550		(44,228	)		5,322		5,545		407

Total other non-investment grade mortgage-backed securities	$	344,827	$	(155,412	)	$	189,415	$	190,279	$	80,174

Non-investment grade residual securities								$	225,815	$	250,573

Total mortgage-backed securities								$	5,732,044	$	5,443,245

At September 30, 2007, other investment grade and non-investment grade mortgage-backed securities totaled $914.4 million, of which 88% were collateralized by prime loans and 12% were collateralized by subprime loans.

TABLE 13. OTHER RETAINED ASSETS

The carrying value of AAA-rated and agency interest-only, principal-only, prepayment penalty, residual and non-investment grade securities is evaluated by discounting estimated net future cash flows. For these securities, estimated net future cash flows are primarily based on assumptions related to prepayment speeds, in addition to expected credit loss assumptions on the residual securities. The models used for estimation are periodically tested against historical prepayment speeds and our valuations are benchmarked to external sources, where available. We

also may retain certain other investment grade securities from our securitizations and to a lesser extent purchase from third parties to serve as hedges for our AAA-rated and agency interest-only securities. A summary of the activity of the other retained assets follows (dollars in thousands):


	Three Months Ended									Nine Months Ended
	September 30,			September 30,			June 30,			September 30,			September 30,
	2007			2006			2007			2007			2006

AAA-rated and agency interest-only and other investment grade securities:
Beginning balance	$	702,852		$	252,318		$	375,434		$	262,823		$	170,851
Retained investments from securitizations		135,988			18,149			233,375			428,553			63,954
Purchases		80,807			7,369			60,048			199,654			72,366
Transfer from MSRs		—			—			56,040			56,040			—
Transfer to non-investment grade securities		(4,896	)		—			(4,163	)		(10,498	)		—
Impairments		(134	)		—			—			(316	)		(183	)
Sales		(54,581	)		(7,039	)		(16,644	)		(71,225	)		(29,978	)
Clean-up calls exercised		—			—			—			—			(108	)
Cash received, net of accretion		(15,118	)		(3,503	)		(6,097	)		(28,287	)		(19,073	)
Valuation gains (losses) before hedges		(48,861	)		(5,659	)		4,859			(40,687	)		3,806

Ending balance	$	796,057		$	261,635		$	702,852		$	796,057		$	261,635

Principal-only securities:
Beginning balance	$	69,127		$	129,951		$	55,977		$	38,478		$	9,483
Retained investments from securitizations		3,931			3,238			1,118			7,686			10,907
Purchases		—			—			17,733			32,658			121,281
Sales		—			(100,761	)		—			—			(100,761	)
Cash received, net of accretion		(424	)		(2,278	)		(785	)		(1,573	)		(4,252	)
Valuation gains (losses) before hedges		(146	)		5,008			(4,916	)		(4,761	)		(1,500	)

Ending balance	$	72,488		$	35,158		$	69,127		$	72,488		$	35,158

Prepayment penalty and late fee securities:
Beginning balance	$	88,613		$	80,036		$	93,106		$	97,576		$	75,741
Retained investments from securitizations		11,047			13,801			22,058			41,210			35,858
Transfer from MSRs/residual securities		1,985			3,642			1,211			3,359			3,642
Cash received, net of accretion		(5,065	)		(12,307	)		(6,686	)		(22,285	)		(34,726	)
Valuation gains (losses) before hedges		(8,341	)		13,250			(21,076	)		(31,621	)		17,907

Ending balance	$	88,239		$	98,422		$	88,613		$	88,239		$	98,422

Non-investment grade securities:
Beginning balance	$	183,323		$	88,045		$	110,204		$	80,173		$	57,712
Retained investments from securitizations		21,446			3,324			65,908			113,265			34,205
Purchases		—			—			9,758			11,585			—
Transfer from investment grade securities		4,896			—			4,163			10,498			—
Impairments		(223	)		(156	)		—			(326	)		(610	)
Sales		—			(12,401	)		—			—			(12,401	)
Cash received, net of accretion		(413	)		296			(969	)		(539	)		392
Valuation losses before hedges		(18,750	)		(830	)		(5,741	)		(24,377	)		(1,020	)

Ending balance	$	190,279		$	78,278		$	183,323		$	190,279		$	78,278

Residual securities(1):
Beginning balance	$	259,872		$	240,522		$	270,831		$	250,573		$	167,771
Retained investments from securitizations, net(2)		1,679			23,608			13,397			38,783			109,417
Transfer to prepayment penalty securities		(2,000	)		(1,041	)		(1,076	)		(3,076	)		(1,041	)
Transfer due toclean-up calls and other		—			—			—			(5,615	)		—
Impairments		(4,004	)		(3,626	)		—			(5,774	)		(4,926	)
Clean-up calls exercised		—			—			(2,106	)		(2,106	)		—
Cash received, net of accretion		7,115			(6,431	)		(7,565	)		6,414			(15,735	)
Valuation gains (losses) before hedges		(36,847	)		8,626			(13,609	)		(53,384	)		6,172

Ending balance	$	225,815		$	261,658		$	259,872		$	225,815		$	261,658


(1)		Included in the residual securities balance at September 30, 2007 were $7.4 million of HELOC residuals retained from two separate guaranteed mortgage securitization transactions. There was no gain on sale of loans recognized in connection with these transactions.

(2)		Amounts retained consist of 100% in HELOCs for the three months ended September 30, 2007.

TABLE 14. VALUATION OF MSRs, INTEREST-ONLY, PREPAYMENT PENALTY, AND RESIDUAL SECURITIES

MSRs, AAA-rated and agency interest-only securities, prepayment penalty securities, and residual securities are recorded at fair value. Relevant information and assumptions used to value these securities as of the dates indicated follows (dollars in thousands):


	Actual															Valuation Assumptions
					Gross Wtd.			Servicing			3-Month			Weighted		Lifetime			3-Month						Remaining
	Book		Collateral		Average			Fee/Interest			Prepayment			Average		Prepayment			Prepayment			Discount			Cumulative
	Value		Balance		Coupon			Strip			Speeds			Multiple		Speeds			Speeds			Yield			Loss Rate(1)

September 30, 2007
MSRs	$	2,489,611	$	173,915,457		7.04	%		0.34	%		12.0	%		4.18		20.1	%		16.5	%		9.1	%		N/A

AAA-rated interest-only securities	$	71,901	$	5,398,591		6.60	%		0.49	%		12.1	%		2.70		18.5	%		15.0	%		12.9	%		N/A

Prepayment penalty securities	$	68,760	$	20,130,891		7.44	%		N/A			11.5	%		N/A		22.6	%		17.7	%		21.5	%		N/A

Lot loan residual securities		64,702	$	1,896,031		9.82	%		3.72	%		32.7	%		0.92		47.1	%		48.5	%		21.8	%		0.81	%
HELOC residual securities		61,039	$	2,803,733		9.27	%		2.77	%		27.3	%		0.79		30.5	%		26.3	%		19.0	%		4.62	%
Closed-end seconds residual securities		22,616	$	2,157,271		10.55	%		1.79	%		16.1	%		0.59		17.7	%		28.0	%		23.2	%		10.88	%
Subprime residual securities		77,458	$	5,176,606		8.30	%		2.59	%		23.1	%		0.58		31.3	%		27.8	%		19.0	%		6.99	%

Total non-investment grade residual securities	$	225,815

September 30, 2006
MSRs	$	1,631,316	$	124,394,943		6.96	%		0.37	%		18.2	%		3.59		24.8	%		18.2	%		9.6	%		N/A

AAA-rated interest-only securities	$	68,440	$	4,424,080		6.68	%		0.52	%		12.7	%		2.95		16.7	%		17.2	%		13.6	%		N/A

Prepayment penalty securities	$	98,422	$	19,441,542		7.17	%		N/A			23.0	%		N/A		25.3	%		18.8	%		22.9	%		N/A

Lot loan residual securities		66,133	$	2,262,810		8.95	%		3.50	%		34.9	%		0.83		39.8	%		38.6	%		23.0	%		0.56	%
HELOC residual securities		95,745	$	2,661,610		9.65	%		3.21	%		44.5	%		1.12		50.0	%		48.7	%		19.9	%		0.81	%
Closed-end seconds residual securities		14,841	$	1,222,620		10.43	%		4.14	%		18.7	%		0.29		36.7	%		22.5	%		24.9	%		7.65	%
Subprime residual securities		84,939	$	5,427,460		7.68	%		1.70	%		28.0	%		0.92		39.4	%		35.8	%		20.2	%		5.47	%

Total non-investment grade residual securities	$	261,658

June 30, 2007
MSRs	$	2,387,077	$	167,710,148		7.06	%		0.35	%		18.1	%		4.12		20.7	%		19.1	%		8.7	%		N/A

AAA-rated interest-only securities	$	136,267	$	5,860,016		6.57	%		0.74	%		17.5	%		3.14		19.6	%		18.5	%		12.7	%		N/A

Prepayment penalty securities	$	75,730	$	20,181,683		7.36	%		N/A			14.9	%		N/A		23.4	%		23.2	%		17.3	%		N/A

Lot loan residual securities		67,398	$	2,021,954		9.64	%		4.14	%		36.7	%		0.81		41.3	%		39.7	%		21.8	%		0.73	%
HELOC residual securities		90,150	$	2,898,580		9.58	%		2.64	%		38.0	%		1.18		43.3	%		43.3	%		19.3	%		1.85	%
Closed-end seconds residual securities		28,303	$	2,260,980		10.56	%		4.78	%		14.7	%		0.26		20.3	%		23.8	%		23.0	%		9.86	%
Subprime residual securities		74,021	$	5,570,118		8.17	%		1.91	%		25.1	%		0.69		29.9	%		24.5	%		19.3	%		6.31	%

Total non-investment grade residual securities	$	259,872


(1)		As a percentage of the original pool balance, the actual loss rate to date totaled 1.33%, 2.80%, 0.83% and 0.01% for HELOC, closed-end seconds, subprime, and lot loans, respectively, at September 30, 2007.

The lifetime prepayment speeds represent the annual constant prepayment rate (“CPR”) estimated for the remaining life of the collateral supporting the asset. The prepayment rates are projected using a prepayment model developed by a third-party vendor and calibrated for our collateral. The model considers key factors, such as refinance incentive, housing turnover, seasonality and aging of the pool of loans. Prepayment speeds incorporate expectations of future rates implied by the market forward LIBOR/swap curve, as well as collateral specific current coupon information.

The weighted-average multiple for MSRs, AAA-rated and agency interest-only securities and residual securities represent the book value divided by the product of collateral balance and servicing fee/interest strip. While the weighted-average life of such assets is a function of the undiscounted cash flows, the multiple is a function of the discounted cash flows. With regard to AAA-rated and agency interest-only securities, the marketplace frequently uses calculated multiples to assess the overall impact valuation assumptions have on value. Collateral type, coupon, loan age and the size of the interest strip must be considered when comparing these multiples. The mix of collateral types supporting servicing-related assets is primarily non-conforming/conventional, which may make our MSR multiples incomparable to peer multiples whose product mix is substantially different.

Beginning in the fourth quarter of 2006, the calculation of remaining cumulative loss rate changed to using the remaining lifetime loss projection divided by current collateral balance. All prior periods have been adjusted to reflect such change.

TABLE 15. DEPOSITS BY CHANNEL AND PRODUCT

The following table shows our deposits by channel as of the dates indicated (dollars in thousands):


	September 30, 2007					September 30, 2006					December 31, 2006
			% of					% of					% of
			Total					Total					Total
	Amount		Deposits			Amount		Deposits			Amount		Deposits

Deposit Channel
Branch	$	6,750,823		40	%	$	4,729,699		47	%	$	5,211,365		48	%
Internet		1,460,766		9	%		1,121,653		11	%		1,185,423		11	%
Telebanking		1,820,054		11	%		1,249,974		12	%		1,290,595		12	%
Money desk		5,976,053		35	%		2,358,272		23	%		2,593,719		24	%
Custodial		766,942		5	%		651,421		7	%		616,904		5	%

Total deposits	$	16,744,638		100	%	$	10,111,019		100	%	$	10,898,006		100	%

The following table presents our deposits by product as of the dates indicated (dollars in thousands):


	September 30, 2007					September 30, 2006					December 31, 2006
	Amount		Rate			Amount		Rate			Amount		Rate

Deposit Product
Non-interest-bearing checking	$	78,599		0.0	%	$	71,013		0.0	%	$	72,081		0.0	%
Interest-bearing checking		56,579		1.7	%		51,333		1.2	%		54,844		1.2	%
Savings		2,498,170		4.8	%		1,696,859		4.9	%		1,915,333		5.0	%
Custodial accounts		766,942		0.0	%		651,421		0.0	%		616,904		0.0	%

Total core deposits		3,400,290		3.6	%		2,470,626		3.4	%		2,659,162		3.6	%
Certificates of deposit		13,374,348		5.2	%		7,640,393		5.0	%		8,238,844		5.2	%

Total deposits	$	16,774,638		4.9	%	$	10,111,019		4.6	%	$	10,898,006		4.8	%


ITEM 3.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Please refer to “Sensitivity to Market Risk” on page 44 as well as Item 1A included on page 82 for quantitative and qualitative disclosure about market risk.


ITEM 4.	*CONTROLS AND PROCEDURES*

The management of Indymac is responsible for establishing and maintaining effective disclosure controls and procedures, as defined underRules 13a-15 and15d-15 of Securities Exchange Act of 1934. As of September 30, 2007, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Indymac’s disclosure controls and procedures. Based on that evaluation, management concluded that Indymac’s disclosure controls and procedures as of September 30, 2007 were effective in ensuring that information required to be disclosed in this Quarterly Report onForm 10-Q was recorded, processed, summarized, and reported within the time period required by the SEC’s rules and forms.

There have been no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect the Company’s disclosure of controls and procedures subsequent to September 30, 2007.


ITEM 1.	*FINANCIAL STATEMENTS*

INDYMAC BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	September 30,			December 31,
	2007			2006
	(Unaudited)

ASSETS
Cash and cash equivalents	$	784,987		$	541,725
Securities classified as trading		1,407,644			542,731
Securities classified as available for sale		4,324,400			4,900,514
Loans held for sale		14,022,234			9,467,843
Loans held for investment, net of allowance for loan losses of $161,768 and $62,386 at September 30, 2007 and December 31, 2006, respectively		8,390,861			10,114,823
Mortgage servicing rights		2,489,611			1,822,455
Other assets		2,312,973			2,105,225

Total assets	$	33,732,710		$	29,495,316

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits	$	16,774,638		$	10,898,006
Advances from Federal Home Loan Bank		11,094,800			10,412,800
Other borrowings		2,189,681			4,637,000
Other liabilities		1,311,948			1,519,242

Total liabilities		31,371,067			27,467,048

Perpetual preferred stock in subsidiary		491,000			—
Shareholders’ Equity
Preferred stock — authorized, 10,000,000 shares of $0.01 par value; none issued		—			—
Common stock — authorized, 200,000,000 shares of $0.01 par value; issued 104,901,301 shares and 102,258,939 shares at September 30, 2007 and December 31, 2006, respectively		1,049			1,023
Additionalpaid-in-capital, common stock		1,674,788			1,597,814
Accumulated other comprehensive loss		(66,117	)		(31,439	)
Retained earnings		767,883			983,348
Treasury stock		(506,960	)		(522,478	)

Total shareholders’ equity		1,870,643			2,028,268

Total liabilities and shareholders’ equity	$	33,732,710		$	29,495,316

The accompanying notes are an integral part of these financial statements.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousand, except per share data)


	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2007			2006		2007			2006

Interest income
Mortgage-backed and other securities	$	101,901		$	86,212	$	289,717		$	233,693
Loans held for sale		283,882			196,924		825,301			551,564
Loans held for investment		152,049			151,488		477,792			418,845
Other		20,019			12,127		52,195			32,706

Total interest income		557,851			446,751		1,645,005			1,236,808
Interest expense
Deposits		170,540			113,758		441,225			280,841
Advances from Federal Home Loan Bank		183,192			115,769		541,896			329,846
Other borrowings		61,941			80,513		235,392			232,046

Total interest expense		415,673			310,040		1,218,513			842,733

Net interest income		142,178			136,711		426,492			394,075
Provision for loan losses		98,279			4,988		126,170			11,040

Net interest income after provision for loan losses		43,899			131,723		300,322			383,035
Non-interest income (loss)
Gain (loss) on sale of loans		(251,119	)		160,225		(32,545	)		503,083
Service fee income		212,929			21,058		347,733			79,194
Gain (loss) on mortgage-backed securities		(93,669	)		18,968		(145,362	)		24,611
Fee and other income		45,574			13,600		87,302			37,276

Total non-interest income (loss)		(86,285	)		213,851		257,128			644,164

Net revenues		(42,386	)		345,574		557,450			1,027,199
Non-interest expense		270,128			203,128		710,763			578,842

Earnings (loss) before provision (benefit) for income taxes and minority interests		(312,514	)		142,446		(153,313	)		448,357
Provision (benefit) for income taxes		(122,193	)		56,266		(60,013	)		176,545

Net earnings (loss) before minority interests		(190,321	)		86,180		(93,300	)		271,812
Minority interests		12,396			—		12,396			1,124

Net earnings (loss)	$	(202,717	)	$	86,180	$	(105,696	)	$	270,688

Earnings (loss) per share:
Basic	$	(2.77	)	$	1.25	$	(1.46	)	$	4.07
Diluted(1)	$	(2.77	)	$	1.19	$	(1.46	)	$	3.87
Weighted-average shares outstanding:
Basic		73,134			68,866		72,617			66,570
Diluted(1)		73,134			72,286		72,617			70,009
Dividends declared per share	$	0.50		$	0.48	$	1.50		$	1.38


(1)		To avoid the antidilutive impact from diluted shares due to the Company’s net loss for the three and nine months ended September 30, 2007, the diluted loss per share and weighted-average diluted shares outstanding are the same as basic loss per share and weighted-average shares outstanding.

The accompanying notes are an integral part of these financial statements.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(Dollars in thousands)


										Accumulated
							Additional			Other									Total
	Shares			Common			Paid-In-			Comprehensive			Retained			Treasury			Shareholders’
	Outstanding			Stock			Capital			Loss			Earnings			Stock			Equity

Balance at December 31, 2005		64,246,767		$	934		$	1,318,751		$	(15,157	)	$	759,330		$	(520,417	)	$	1,543,441
Comprehensive income:
Net earnings		—			—			—			—			270,688			—			270,688
Other comprehensive income (loss), net of tax:
Net unrealized gain on mortgage-backed securities available for sale		—			—			—			7,816			—			—			7,816
Net unrealized loss on derivatives used in cash flow hedges		—			—			—			(14,036	)		—			—			(14,036	)

Total comprehensive income		—			—			—			—			—			—			264,468

Cumulative-effect adjustment due to change in accounting for MSRs		—			—			—			—			10,624			—			10,624
Issuance of common stock		2,969,165			30			123,696			—			—			—			123,726
Exercises of common stock options		800,993			8			21,807			—			—			—			21,815
Exercises of warrants		2,466,974			25			54,125			—			—			—			54,150
Compensation expense for common stock options		—			—			7,386			—			—			—			7,386
Net officers’ notes receivable payments		—			—			100			—			—			—			100
Deferred compensation and restricted stock amortization, net of forfeitures		426,489			4			7,663			—			—			—			7,667
Purchases of common stock		(51,728	)		—			—			—			—			(2,061	)		(2,061	)
Cash dividends		—			—			—			—			(93,484	)		—			(93,484	)

Balance at September 30, 2006		70,858,660		$	1,001		$	1,533,528		$	(21,377	)	$	947,158		$	(522,478	)	$	1,937,832

Balance at December 31, 2006		73,017,356		$	1,023		$	1,597,814		$	(31,439	)	$	983,348		$	(522,478	)	$	2,028,268
Comprehensive income (loss):
Net loss		—			—			—			—			(105,696	)		—			(105,696	)
Other comprehensive income (loss), net of tax:
Net unrealized loss on mortgage-backed securities available for sale		—			—			—			(34,800	)		—			—			(34,800	)
Net unrealized loss on derivatives used in cash flow hedges		—			—			—			(4,787	)		—			—			(4,787	)
Change in post retirement benefit plan		—			—			—			4,909			—			—			4,909

Total comprehensive loss		—			—			—			—			—			—			(140,374	)

Issuance of common stock		3,467,493			35			74,196			—			—			—			74,231
Exercises of common stock options		144,212			—			6			—			—			2,577			2,583
Exercises of warrants		63,888			1			1,405			—			—			—			1,406
Compensation expense for common stock options		—			—			6,108			—			—			—			6,108
Net officers’ notes receivable payments		—			—			320			—			—			—			320
Deferred compensation and restricted stock amortization, net of forfeitures		296,459			(10	)		(5,061	)		—			—			14,444			9,373
Purchases of common stock		(39,971	)		—			—			—			—			(1,503	)		(1,503	)
Cash dividends		—			—			—			—			(109,769	)		—			(109,769	)

Balance at September 30, 2007		76,949,437		$	1,049		$	1,674,788		$	(66,117	)	$	767,883		$	(506,960	)	$	1,870,643

The accompanying notes are an integral part of these financial statements.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	For the Nine Months
	Ended September 30,
	2007			2006

Cash flows from operating activities:
Net earnings (loss)	$	(105,696	)	$	270,688
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
(Gain) loss on sale of loans		32,545			(503,083	)
Compensation expense related to stock options and restricted stocks		15,481			15,053
Other amortization and depreciation		104,264			54,240
Change in valuation of mortgage servicing rights, including amortization		(1,514	)		243,339
(Gain) loss on mortgage-backed securities, net		145,362			(24,611	)
Provision for loan losses		126,170			11,040
Provision (benefit) for deferred income taxes		(60,013	)		186,127
Net (increase) decrease in other assets and liabilities		(133,416	)		38,742

Net cash provided by operating activities before activity for trading securities and loans held for sale		123,183			291,535
Net sales (purchases) of trading securities		(399,334	)		245,560
Net purchases and originations of loans held for sale		(6,293,995	)		(5,933,894	)

Net cash used in operating activities		(6,570,146	)		(5,396,799	)

Cash flows from investing activities:
Payments on loans held for investment, net		985,214			454,547
Proceeds from sales of loans held for investment		510,253			9,185
Purchases of mortgage-backed securities available for sale		(430,519	)		(570,884	)
Proceeds from sales of and principal payments from mortgage-backed securities available for sale		1,270,610			652,610
Net increase in investment in Federal Home Loan Bank stock, at cost		(66,925	)		(80,388	)
Net decrease in real estate investment		1,740			7,483
Net sale (purchases) of property, plant and equipment		49,799			(74,465	)
Purchase of Financial Freedom minority interest		—			(40,000	)

Net cash provided by investing activities		2,320,172			358,088

Cash flows from financing activities:
Net increase in deposits		5,874,312			2,436,235
Net increase in advances from Federal Home Loan Bank		682,000			2,379,800
Net increase (decrease) in borrowings		(2,503,076	)		97,920
Net proceeds from issuance of common stock		74,231			123,726
Net proceeds from issuance of trust preferred securities		30,000			128,000
Redemption of trust preferred securities		(48,268	)		(28,587	)
Net proceeds from stock options, warrants and notes receivable		4,309			76,065
Proceeds from issuance of preferred stock by subsidiary		491,000			—
Cash dividends paid		(109,769	)		(93,484	)
Purchases of common stock		(1,503	)		(2,061	)

Net cash provided by financing activities		4,493,236			5,117,614

Net increase in cash and cash equivalents		243,262			78,903
Cash and cash equivalents at beginning of period		541,725			442,525

Cash and cash equivalents at end of period	$	784,987		$	521,428

Supplemental cash flow information:
Cash paid for interest	$	1,109,796		$	779,203

Cash paid (received) for income taxes	$	4,751		$	(48,685	)

Supplemental disclosure of non-cash investing and financing activities:
Net transfer of loans held for sale to loans held for investment	$	1,059,363		$	2,258,617

Net transfer of loans held for investment to loans held for sale	$	1,066,503		$	—

Net transfer of mortgage servicing rights to trading securities	$	54,993		$	2,601

The accompanying notes are an integral part of these financial statements.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2007

(Unaudited)


NOTE 1 —	BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Indymac Bancorp and all of its wholly-owned and majority-owned subsidiaries, including IndyMac Bank, F.S.B. (“Indymac Bank”) and variable interest entities. All significant intercompany balances and transactions with Indymac’s consolidating subsidiaries have been eliminated in consolidation. Minority interests and perpetual preferred stock in Indymac’s majority-owned subsidiaries or variable interest entities are either reported separately or included in “other liabilities” on the consolidated balance sheets. Minority interests on Indymac’s earnings are reported separately on the consolidated statements of operations.

The consolidated financial statements of Indymac are prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission’s instructions onForm 10-Q andRule 10-01 ofRegulation S-X. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. The foregoing financial statements are unaudited; however, in the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair statement of the results for the interim periods have been included. Certain prior year amounts have been reclassified to conform to the current year presentation.

The preparation of these financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Operating results for the three and nine months ended September 30, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated financial statements and footnotes thereto included in Indymac’s 200610-K.


NOTE 2 —	NEWLY ADOPTED AND NEW ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48,“Accounting for Uncertainty in Income Taxes”(“FIN 48”), an interpretation of FASB Statement No. 109,“Accounting for Income Taxes.”FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the law is uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted this Statement on January 1, 2007 and the Company recognizes interest and penalties in other expense. The adoption of FIN 48 did not have a material impact on the consolidated financial statements.

In September 2006, the FASB issued Statement No. 157,“Fair Value Measurements”(“SFAS 157”). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under U.S. GAAP. SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is effective prospectively for fiscal years beginning after November 15, 2007. The Company will adopt SFAS 157 on January 1, 2008, and is assessing the impact of the adoption of this Statement.

In February 2007, the FASB issued Statement No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities”(“SFAS 159”). SFAS 159 would allow the Company an irrevocable election to measure certain financial assets and liabilities at fair value, with unrealized gains and losses on the elected items recognized in earnings at each reporting period. The fair value option may only be elected at the time of initial recognition of a financial asset or financial liability or upon the occurrence of certain specified events. The election is applied on an instrument by instrument basis, with a few exceptions, and is applied only to entire instruments and not to portions of instruments. SFAS 159 also provides expanded disclosure requirements regarding the effects of electing the fair value option on the financial statements. SFAS 159 is effective prospectively for fiscal years beginning after

INDYMAC BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

November 15, 2007. The Company is currently evaluating this Statement and has not yet determined the financial assets and liabilities, if any, for which the fair value option would be elected or the potential impact on the consolidated financial statements, if such election were made.

In April 2007, the FASB issued FSPNo. FIN 39-1,“Amendment of FASB Interpretation No. 39”(“FSP 39-1”).FSP 39-1 amends FIN No. 39,“Offsetting of Amounts Related to Certain Contracts”(“FIN 39”), to permit a reporting entity to offset fair value amounts recognized for the right to reclaim cash collateral (a receivable) or the obligation to return cash collateral (a payable) against fair value amounts recognized for derivative instruments executed with the same counterparty under the same master netting arrangement that have been offset in accordance with FIN 39.FSP 39-1 also amends FIN 39 for certain terminology modifications.FSP 39-1 is effective for fiscal years beginning after November 15, 2007, with early application permitted. Upon adoption ofFSP 39-1, a reporting entity is permitted to change its accounting policy to offset or not offset fair value amounts recognized for derivative instruments under master netting arrangements. The Company adoptedFSP 39-1 on September 30, 2007 and elected to offset derivative instruments executed with the same counterparty under the same master netting arrangement and to net cash collateral paid or collected in accordance withFSP 39-1. The adoption ofFSP 39-1 did not have a material impact on the consolidated financial statements.


NOTE 3 —	SEGMENT REPORTING

The Company operates through two primary segments: mortgage banking and thrift. For more information regarding each segment as well as the accounting methodology used for reporting segment financial results, refer to “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Summary of Business Segment Results” on page 9. Commercial mortgage banking, mortgage banking overhead, elimination and other, and corporate overhead costs, such as corporate salaries and related expenses, excess capital and non-recurring corporate items not allocated to the operating channels, are included in the “Other” column in the tables below.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table presents segment information for the periods indicated (dollars in thousands):


	Mortgage Banking Segment
	Mortgage			Mortgage
	Production			Servicing			Thrift						Total
	Divisions			Division			Segment			Other			Company

Three months ended September 30, 2007
Net interest income (expense)	$	50,572		$	(12,080	)	$	73,829		$	29,857		$	142,178
Net revenues (expense)		(90,478	)		162,428			(141,544	)		27,208			(42,386	)
Net earnings (loss)		(123,579	)		85,275			(104,411	)		(60,002	)		(202,717	)
Allocated average capital		735,561			399,237			914,473			5,110			2,054,381
Assets as of September 30, 2007	$	11,408,294		$	4,351,220		$	16,695,380		$	1,277,816		$	33,732,710
Return on average equity		(67	)%		85	%		(45	)%		N/A			(39	)%
Three months ended September 30, 2006
Net interest income (expense)	$	41,218		$	(3,323	)	$	79,043		$	19,773		$	136,711
Net revenues (expense)		204,391			47,672			102,823			(9,312	)		345,574
Net earnings (loss)		68,981			20,056			46,016			(48,873	)		86,180
Allocated average capital		509,136			269,464			820,043			272,736			1,871,379
Assets as of September 30, 2006	$	7,687,438		$	2,431,620		$	16,318,328		$	948,097		$	27,385,483
Return on average equity		54	%		30	%		22	%		N/A			18	%
Nine months ended September 30, 2007
Net interest income (expense)	$	161,681		$	(24,546	)	$	215,348		$	74,009		$	426,492
Net revenues (expense)		253,180			295,225			(13,363	)		22,408			557,450
Net earnings (loss)		(41,236	)		142,088			(58,971	)		(147,577	)		(105,696	)
Allocated average capital		717,083			360,140			888,219			89,588			2,055,030
Assets as of September 30, 2007	$	11,408,294		$	4,351,220		$	16,695,380		$	1,277,816		$	33,732,710
Return on average equity		(8	)%		53	%		(9	)%		N/A			(7	)%
Nine months ended September 30, 2006
Net interest income (expense)	$	122,119		$	(6,840	)	$	231,485		$	47,311		$	394,075
Net revenues (expense)		621,018			120,775			301,133			(15,727	)		1,027,199
Net earnings (loss)		219,174			51,329			134,710			(134,525	)		270,688
Allocated average capital		513,941			240,426			774,884			208,934			1,738,185
Assets as of September 30, 2006	$	7,687,438		$	2,431,620		$	16,318,328		$	948,097		$	27,385,483
Return on average equity		57	%		29	%		23	%		N/A			21	%


NOTE 4 —	STOCK-BASED COMPENSATION

The Company has two stock incentive plans, the 2002 Incentive Plan, as amended and restated, and the 2000 Stock Incentive Plan, as amended (collectively, the “Plans”), which provide for the granting of non-qualified and incentive stock options, restricted and performance stock awards, and other awards to employees (including officers) and directors. Options granted under the Plans have an exercise price equal to the fair market value of the underlying common stock on the date of grant, and generally vest based on one, three or five years of continuous service. Grants issued after April 25, 2006 will expire in seven years from the grant date, while grants issued prior to April 25, 2006 have a ten-year term. Certain option and share awards provide for accelerated vesting if there is a change in control (as defined in the Plans). The fair value of each option award is estimated on the date of grant using an enhanced binomial lattice model.

INDYMAC BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table shows the assumptions used in the valuations for options granted during the periods indicated:


	Nine Months Ended September 30,
	2007			2006

Expected volatility		28.68 - 30.20	%		28.11 - 28.44	%
Expected dividends		5.08 - 6.76	%		4.00 - 4.60	%
Weighted average expected term (in years)		5.20 - 5.50			6.89 - 7.34
Risk-free rate		4.58 - 4.82	%		4.54 - 4.73	%

The following table shows the impact of stock option compensation cost to the statement of operations during the periods indicated (dollars in thousands except per share data):


					For the Nine
	For the Three Months Ended September 30,				Months Ended September 30,
	2007		2006		2007		2006

Stock option compensation cost, before tax	$	1,723	$	2,422	$	6,108	$	7,386
Stock option compensation cost, after tax		1,181		1,611		3,975		4,530
Effect on basic earnings per share		0.02		0.02		0.05		0.07
Effect on dilutive earnings per share		0.02		0.02		0.05		0.06

There were no options granted during the three months ended September 30, 2007 and 2006. The total fair value of options exercised during the three months ended September 30, 2007 and 2006, was $6 thousand and $1.1 million, respectively. The total fair value of options exercised during the nine months ended September 30, 2007 and 2006, was $1.0 million and $5.2 million, respectively.

As of September 30, 2007, there was $7.7 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options under the Plans. That cost is expected to be recognized in less than three years. The total fair value of shares vested during the three months ended September 30, 2007 and 2006, was $0.1 million and $0.6 million, respectively. The total fair value of shares vested during the nine months ended September 30, 2007 and 2006, was $6.7 million and $10.2 million, respectively.

Cash received from options exercised under the Plans for the nine months ended September 30, 2007 and 2006 was $3.5 million and $18.4 million, respectively. The actual tax benefit for the tax deductions from option exercises totaled $0.7 million and $6.3 million, respectively, for the nine months ended September 30, 2007 and 2006.

The following table shows restricted stock activity under the Plans during the periods indicated:


	Three Months Ended					Nine Months Ended
	September 30, 2007					September 30, 2007
				Weighted-					Weighted-
				Average					Average
				Grant-Date					Grant-Date
	Shares			Fair Value		Shares			Fair Value

Nonvested, beginning of period		1,226,371		$	35.69		889,117		$	39.14
Granted		46,493			18.68		585,300			29.74
Vested		(2,519	)		34.49		(144,724	)		37.42
Canceled and forfeited		(229,591	)		36.96		(288,939	)		37.11

Nonvested, end of period		1,040,754			34.65		1,040,754			34.65

INDYMAC BANCORP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The Company recorded compensation cost of $1.0 million and $2.8 million related to the restricted stock granted under the Plans for the three months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 and 2006, the compensation cost related to the restricted stock was $7.2 million and $7.3 million, respectively.


NOTE 5 —	DEFINED BENEFIT PENSION PLAN

Through December 31, 2002, Indymac Bank provided a defined benefit pension plan (the “DBP Plan”) to substantially all of its employees. Employees hired prior to January 1, 2003, with one or more years of service, are entitled to annual pension benefits beginning at normal retirement age (65 years of age) equal to a formula approximating 0.9% of final average compensation multiplied by credited service (not in excess of 35 years), subject to a vesting requirement of five years of service. Employees hired after December 31, 2002 are not eligible for the DBP Plan.

The DBP Plan has been frozen since May 31, 2007 with participants no longer accruing additional benefits starting with the 2007 Plan year. A curtailment gain of $10.3 million was recognized in the second quarter as a reduction to pension expense.


NOTE 6 —	OTHER ASSETS HELD FOR SALE

On July 11, 2007, the Company completed the sale and leaseback of one of its properties in Pasadena, California for a purchase price of $116 million and entered into a lease agreement for a portion of the property with an initial term of ten years. The leased portion of the property serves as our mortgage banking headquarters. The Company removed the $54.8 million of asset from the balance sheet and recognized approximately $60 million in total gain from the sale and leaseback transaction, with approximately $24 million recognized upon sale in the third quarter of 2007 and the balance amortized over the term of the lease.


NOTE 7 —	SUBSEQUENT EVENTS

In October 2007, Indymac’s Board of Directors declared a cash dividend of $0.25 per share payable on December 6, 2007, to shareholders of record on November 15, 2007. Also, the Board of Directors of Indymac Bank approved a dividend payment on the Series A Preferred Stock equal to $0.53 per share. The cash dividend is payable on December 17, 2007, to shareholders of record on December 3, 2007.

PART II. OTHER INFORMATION


ITEM 1.	*LEGAL PROCEEDINGS*

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to a number of legal actions. Certain of such actions involve alleged violations of employment laws, unfair trade practices, consumer protection laws, including claims relating to the Company’s sales, loan origination and collection efforts, and other federal and state banking laws. Certain of such actions include claims for breach of contract, restitution, compensatory damages, punitive damages and other forms of relief. The Company reviews these actions on an on-going basis and follows the provisions of SFAS No. 5,“Accounting for Contingencies”when making accrual and disclosure decisions. When assessing reasonably possible and probable outcomes, the Company bases its decisions on the evidence discovered and in its possession, the strength of probable witness testimony, the viability of its defenses and the likelihood of prevailing at trial or resolving the matter through alternative dispute resolution. Due to the difficulty of predicting the outcome of such actions, the Company can give no assurance that it will prevail on all claims made against it; however, management believes, based on current knowledge and after consultation with counsel, that these legal actions, individually and in the aggregate, and the losses, if any, resulting from the likely final outcome thereof, will not have a material adverse effect on the Company and its subsidiaries’ financial position, but could have a material impact on the results of operations of particular periods.


ITEM 1A.	*RISK FACTORS*

Indymac’s 200610-K presents on pages 72 to 80 a comprehensive set of risk factors that may impact the Company’s future results. Given recent developments in the mortgage, housing and secondary markets, we are adding the following:

Secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition.

We have significant financing needs that we meet through the capital markets, including the secondary mortgage market. These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on our earnings and financial condition, particularly in the short term.

The private secondary mortgage markets are currently experiencing unprecedented disruptions resulting from reduced investor demand for non-GSE mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we may retain a larger portion of mortgage loans and mortgage-backed securities than we would in other environments. While our capital and liquidity positions are currently adequate and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.

Current and anticipated deterioration in the housing market and the homebuilding industry may lead to increased loss severities and further worsening of delinquencies and non-performing assets in our loan portfolios. Consequently, our results of operations may be adversely impacted.

Recently, the housing and the residential mortgage markets have experienced a variety of difficulties and changed economic conditions. If market conditions continue to deteriorate, they may lead to additional valuation adjustments on our loan portfolios and real estate owned as we continue to reassess the market value of our loan portfolio, the loss severities of loans in default, and the net realizable value of real estate owned.

The homebuilding industry has experienced a significant and sustained decline in demand for new homes and an oversupply of new and existing homes available for sale in various markets, including the ones in which we lend through our homebuilder division. Our builders/borrowers face a greater difficulty in selling their homes in markets where these trends are more pronounced. We do not anticipate that the housing market will improve in the

near-term, and accordingly, additional downgrades, provisions for loan losses and charge-offs relating to this portfolio may occur.


ITEM 2.	*UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS*

There were no unregistered sales of equity securities during the three months ended September 30, 2007.

The following summarizes share repurchase activities during the three months ended September 30, 2007:


					Total Number of		Maximum Approximate
	Total				Shares Purchased		Dollar Value (In Million) of
	Number of		Weighted		as Part of Publicly		Shares that may yet be
	Shares		Average Price		Announced Plans or		Purchased Under the
	Purchased(1)		Paid per Share		Programs		Plans or Programs(2)

Calendar Month:
July 2007		—	$	—		—	$	300
August 2007		248		20.71		—		300
September 2007		150		23.12		—		300

Total		398	$	21.62		—		300


(1)		All shares purchased during the periods indicated represent withholding of a portion of shares to cover taxes in connection with vesting of restricted stocks or exercise of stock options.

(2)		Our Board of Directors previously approved a $500 million share repurchase program. Since its inception in 1999, we have repurchased a total of 28.0 million shares through this program. In January 2007, we obtained an authorization from the Board of Directors to repurchase an additional $236.4 million of common stock for a total current authorization of up to $300 million.


ITEM 6.	*EXHIBITS*


4	.1	2000 Stock Incentive Plan, as amended.
4	.2	2002 Incentive Plan, as Amended and Restated.
10	.1	Amended and Restated Employment Agreement entered into September 17, 2007 between IndyMac Bancorp, Inc. and Michael W. Perry.
10	.2	IndyMac Bank, F.S.B. Deferred Compensation Plan, Amended and Restated Effective as of January 1, 2008.
10	.3	IndyMac Bancorp, Inc. Senior Manager Deferred Compensation Plan Amended and Restated Effective as of September 17, 2007.
31	.1	Chief Executive Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31	.2	Chief Financial Officer’s Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	.1	Chief Executive Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32	.2	Chief Financial Officer’s Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, in the City of Pasadena, State of California, on November 6, 2007.

INDYMAC BANCORP, INC.

(Registrant)


	By:	/s/ MICHAEL W. PERRY

Michael W. Perry

Chairman of the Board of Directors

and Chief Executive Officer


	By:	/s/ A. SCOTT KEYS

A. Scott Keys

Executive Vice President

and Chief Financial Officer

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IndyMac Bancorp (IDMCQ) Inactive 10-Q2007 Q3 Quarterly report

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