Dear Indymac Stakeholders:

In this very difficult and challenging environment, any of the actions that we take to keep Indymac safe and sound unfortunately have negative consequences to some important constituency. As we stated in our financial update on May 12, 2008, we have been working with our investment bankers to raise additional capital. To-date, we have not been successful with these efforts, and, while we will continue these efforts with our bankers and others, we don’t expect to be able to raise capital until there is more stability and less uncertainty in the housing and mortgage markets. While some shareholders may believe it is in their best interests that we not raise capital right now given the significant dilution that it would cause, there are consequences of not being able to raise more capital and, therefore, actions that we now must take.

Given the continued downward trend in home prices and a resulting increase in our forecasted credit losses and the related downward trend in the pricing of all mortgage related assets in the capital markets, especially mortgage-backed securities where we have experienced significant rating agency downgrades this quarter, we expect our loss for the second quarter to be larger than Q108, but it is difficult at this time to be more precise given the significant uncertainty surrounding accounting estimates, fair value accounting and other accounting matters.

In light of the current environment and related deterioration of our financial position since last quarter, we have been working closely with our federal banking regulators with respect to the actions that they and we must take to meet our mutual goal of keeping Indymac safe and sound through this crisis period. In that respect, based on information we have provided to our regulators, they have advised us that we are no longer “well capitalized”, which we stated on May 12 was a possible scenario. Our regulators have also asked us to submit to them a new business plan for their review and approval, something on which we have been working with them for some time. We have agreed on the basic elements of the plan, and the regulators have directed us to begin executing on it. An important element of our plan is to improve our capital ratios. Without an external capital raise, the traditional way to improve safety and soundness is to sell assets and shrink the balance sheet, which in normal times generally has the effect of improving capital ratios and bolstering liquidity. Yet in this environment, where either there are no bids for most of IMB’s mortgage loans and securities or the bid/ask spreads are abnormally wide, “fire-selling” assets would actually deplete capital further. As a result, the most realistic and cost-effective way to shrink both our balance sheet and our servicing rights asset (which, as discussed in previous communications, is up against the regulatory cap limit), is to curtail most new loan production.

In addition to needing to shrink our assets to improve our capital ratios, we also need to do so to ensure that we maintain prudent operating liquidity. A consequence of falling below well-capitalized is that we are no longer permitted to accept new brokered deposits or renew or roll over existing ones, unless we get a waiver from the FDIC. While we have submitted a waiver application, it is uncertain as to whether such a waiver will be granted.

As a result of the above, we have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel. We plan to honor all of our existing rate-locked loans and will continue to fund these loans in the coming weeks. While the managers and employees in these units have worked incredibly hard, these units are not currently profitable due to the continuing erosion of the housing and mortgage markets. At the same time, these operations take up significant balance sheet capacity and “feed” growth in the servicing asset, an asset we need to shrink given its size relative to our existing capital.

In closing our forward mortgage business, we will refocus our lending efforts on supporting and building within regulatory constraints Financial Freedom, our reverse mortgage unit (FHA production only), and on continuing the retention activities associated with our servicing portfolio. Combined, we currently expect these units to produce roughly $5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core business model will include (1) Financial Freedom, one of the largest reverse mortgage lenders in the Country; (2) a top ten mortgage loan servicing operation, with a solid retention production unit; and (3) a Southern California retail bank branch network, including 33 branches and roughly $18 billion in deposits, of which over 96% is fully covered by FDIC insurance. In addition, when this housing and mortgage crisis abates and we return to health, we would also hope to be an investor in mortgage loans and mortgage-backed securities and might re-enter the national forward mortgage production business with a low-cost, non-commissioned-based business model.

Unfortunately, the above actions will necessitate the reduction in our present workforce from approximately 7,200 to roughly 3,400 or so over the next couple of months, which should reduce our operating expenses by roughly 60%. We will retain about 1,100 employees in loan servicing in Kalamazoo and Austin; 350 in our servicing retention group in Irvine and Kansas City; 800 at Financial Freedom, primarily in Irvine, Sacramento, and Atlanta; 400 in our Southern California retail and web bank; 500 in portfolio management and administration, largely in Pasadena; and 250 in discontinued businesses. In building Indymac up from 4 employees in 1993 to its present size, we have had to retrench and then rebuild several times over the past 15 years, but clearly these are the largest and most difficult staff reductions we have ever had to make. If we had another alternative, we clearly would have chosen it, as we understand how painful these workforce reductions can be for the affected employees and their families. Given Indymac’s current financial position and these significant layoffs, I strongly believe it is appropriate that I further materially reduce my own compensation. As a result, I have requested of Indymac’s Board of Directors that they reduce my base salary by 50%.

With respect to severance, our policy has always been that the fair and right thing to do is to provide our departing employees with a generous severance program to ease their transition to the next stage of their career. Our severance program, which provided one month of pay and one month of Indymac-paid COBRA insurance coverage for each year of service, was clearly the most generous in the mortgage industry, if not among most of the Fortune 500. I very much regret that the reality today, however, is that we can no longer afford this program given our need to preserve capital and return to profitability. Therefore, we will be providing employees with a minimum 30-day notice of the termination of their employment (effectively, 30 days severance), with employees covered under the Federal WARN Act and similar state statutes (“WARN”) receiving 60 days of advance notice prior to the effective date of the their termination. Affected employees with five or more years of service will receive a minimum $20,000 severance, including any compensation payments made during the notice period.

With all of the above said, in this environment plans can change often and quickly (e.g. ability to raise capital and/or liquidity, regulatory actions, etc.). All we can do is continue to work hard and do our very best to keep Indymac safe and sound, so that we can rebuild our workforce and shareholder value when the housing and mortgage markets stabilize. We will be providing more information on our plans and prospects when we release Q208 earnings.

Very truly yours,

Michael W. Perry
Chairman and Chief Executive Officer

FORWARD-LOOKING STATEMENTS
Certain statements contained in this press release may be deemed to be forward-looking statements within the meaning of the federal securities laws. Examples include our forecasts relating to the second quarter 2008 losses and capital ratio declines, our expectations about the inability to raise capital in the near term, our ability to take the necessary actions with our regulators to keep Indymac safe and sound, our ability to honor and fund existing rate-locked loans, the expected long-term viability of our revised business model, our projections of a return to profitability and strong capital levels, and our ability to rebuild our workforce and shareholder value. Words such as “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,” identify forward-looking statements that are inherently subject to risks and uncertainties, many of which 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 due to a number of factors, including: the effect of economic and market conditions including, but not limited to, recent disruptions in the housing and credit markets, including the level of housing prices, industry volumes and margins; the level and volatility of interest rates; Indymac’s ability to down-size its business and reduce costs expeditiously; Indymac’s hedging strategies, hedge effectiveness and overall asset and liability management; the accuracy of subjective estimates used in determining the fair value of financial assets of Indymac; the implementation of new accounting pronouncements and guidance; the various credit risks associated with our loans and other financial assets, including increased credit losses due to downward trends in the economy and the real estate market and increased delinquency rates of borrowers; the adequacy of credit reserves and the assumptions underlying them; the actions undertaken by both current and potential new competitors; the availability of funds from Indymac’s lenders (in particular, Federal Home Loan Bank and the Federal Reserve Bank), loan sales, securitizations, deposits and all other sources used to fund reverse mortgage loan originations and portfolio investments; and the execution of Indymac’s business and restructuring plans in a significant and turbulent market transition. Additional risk factors include the impact of disruptions triggered by natural disasters; pending or future legislation, regulations and regulatory action, or litigation, and factors described in the reports that Indymac files with the Securities and Exchange Commission, including its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and its reports on Form 8-K. Indymac does not undertake to update or revise forward-looking statements to reflect the impact of circumstances for events that arise after the date the forward-looking statements are made.

The Center for Responsible Lending (CRL) issued a report yesterday titled, “Indymac: What Went Wrong?” in which they allege that Indymac “fueled its growth with unsound and abusive mortgage lending”. The report relies entirely on unsubstantiated anecdotal evidence the CRL has obtained largely from (1) unsubstantiated claims contained in lawsuits that are pending against Indymac (in one of which the CRL is itself a plaintiff), where no liability has been established and where Indymac is vigorously disputing the claims asserted; (2) 19 disgruntled former employees, many of whom have been recruited as witnesses by plaintiffs’ trial attorneys in the same lawsuits; and (3) a handful of Indymac customers, many of whom are also plaintiffs or class members in the same lawsuits. The report relies most heavily on one lawsuit in particular, Tripp v. Indymac, which has already been dismissed twice by the court as lacking in merit. Yet the report accepts as true all the claims in this lawsuit (and others) and all the statements of disgruntled former employees and customers as facts, and reaches its erroneous conclusions accordingly.

This calculated “hit piece” on Indymac is shoddy journalism at best and cannot be considered fact-based research in any way, particularly given the fact that the CRL is a plaintiff in one of the aforementioned lawsuits. In fact, the CRL never contacted anyone at Indymac to check on any of the facts they assert or to get our response on any of the issues they have raised. The CRL has issued similar scurrilous reports on both Wells Fargo and Freddie Mac and apparently feels that is accountable to no one.

We are not going to respond to every allegation made by the CRL in its report. We’ll let these matters be decided in the courts, and we are confident in the outcome. However, we do want to point out what are some real facts about Indymac:

• Since 1993, when the current management team took over, Indymac has made approximately 1.7 million mortgage loans through May 31, 2008. In total, approximately 43,000 of these borrowers have lost their homes to foreclosure during this 15 ½ -year time period. While we never like to foreclose on borrowers and do everything we can to help our borrowers stay in their homes, especially in today’s difficult housing and credit market (in fact, in the 11 months ending 5/31/08, we have completed over 42,000 loan modifications and repayment plans for our borrowers, representing a multiple of total loan workouts to foreclosures of over 2.5-to-1 during this time period), the bottom line is that our borrowers’ success rate over the 15 ½ -year period through May 31, 2008 has been 97.5%, which must be considered a strong track record in any context.
• Given the current housing and credit environment, where home prices are declining precipitously nationwide for the first time since the Great Depression, foreclosures are on the rise, as everyone knows. At this time, we expect roughly an additional 10,000 to 20,000 during the remainder of 2008, despite our best efforts to keep people in their homes. While this is regrettable, adding these foreclosures to the cumulative total through May 31, 2008, we would still have an overall success rate of 96% to 97% with our mortgage borrowers. Again, this is a pretty strong rate of success, and it is hard to conclude that Indymac is guilty of “unsound and abusive lending” based on these results over a 16-year timeframe.
• The report cites 19 ex-employees who have negative things to say about our lending practices. At our peak we had more than 10,000 people in our workforce, and many thousands more have worked at Indymac over the years. The vast majority of them would say that that their experience at IMB was a very positive one. Trial attorneys are very skilled at dredging up disgruntled former employees who will testify to support their cases, and, when you have had thousands of employees, it is not hard to find a few that are unhappy. This is a fact of life at any company of our size. The important point is that none of the claims of these former employees have been established as true in a court of law, and we are confident that when this litigation is concluded IMB will prevail.
• In relation to the over 1.7 million mortgage loans we have done in our history, totaling over $350 billion, we have had very few lawsuits brought against us about our lending practices, particularly as compared to many other home lenders. We think this speaks volumes for the way we have always conducted our business.

The bottom line is that Indymac is at the center of a housing and credit crisis the likes of which has not been seen since the Great Depression. Well over 200 mortgage companies have failed to date, and many much larger and more diversified financial institutions than Indymac have suffered major losses and erosion of shareholder value as a result. Indymac Bank has been at the forefront in responding to this crisis, most recently leading the mortgage lending industry by implementing a new system and set of tools to enable our borrowers to truly choose the mortgage loan that is most appropriate for them. In this environment, many critics emerge who propose no solutions to the problem and are just looking for someone to blame. The CRL, with its shoddy and unsubstantiated research and with an axe to grind as a plaintiff in one of the aforementioned lawsuits, is one such entity. We are focusing our efforts on working through this crisis and helping our borrowers do the same, which is the right thing to do. We won’t be sidetracked by the attacks of entities like the CRL, which has an agenda where the facts don’t seem to matter.

Grove Nichols
Communications Director

In regard to the letters sent last week by Senator Charles Schumer to the various regulatory bodies, Indymac has the following response:

We agree with Senator Schumer that in times like these it is important that we all work together to keep institutions like Indymac Bank safe and sound and that anything that can be done in this turbulent financial market environment to further improve the safety and soundness of any financial institution should be done and would be welcome.

That said, his letters leave the wrong impression with respect to three matters.

First, our regulators have been actively involved and are up-to-date on our business and financial position, which has deteriorated since last quarter. We are currently working on a plan, with their feedback and involvement, to further improve the safety and soundness of Indymac, and we will provide more information as that plan becomes more fully developed.

Second, the Federal Home Loan Bank (FHLB) of San Francisco has been diligent in protecting its financial position by systematically and substantially increasing its margin requirements on the mortgage loans and mortgage securities that it has financed for all financial institutions, including Indymac Bank.

This leads to the third issue. Senator Schumer inferred that Indymac utilized brokered deposits to “finance rapid and … irresponsible growth” during this period due to the fact that our brokered deposits increased from 12/31/06 to 3/31/08. We have maintained a diversified funding model over our years of operating as a Federally-insured depository institution, a structure we believe has provided us with the strength to withstand this very difficult market environment while other capital markets funded companies have not. This funding model predominantly included FHLB advances and insured deposits, with a smaller amount of market funded commercial paper and repurchase agreements. When the credit markets collapsed last summer, we, like many financial institutions, raised deposits (both retail and brokered) to improve our operating liquidity, to meet the higher margin requirements imposed by the FHLB and to pay off completely all of our market funding sources. While insured, brokered deposits were used from an expediency perspective, we have since worked on raising retail deposits and expect that brokered deposits as a percentage of our overall funding will decline substantially over the next several quarters. Contrary to Sen. Schumer’s inference, our use of insured, brokered deposits has lowered the risk for Indymac Bank and improved our safety and soundness during this turbulent period.

Lastly, despite the fact that over 96% of our approximate total of $19 billion in deposits are fully insured by the FDIC (and no depositor who is fully insured has ever lost one penny in the 75 year history of the FDIC), as a result of Sen. Schumer making his letters public and the resulting press coverage, we did experience elevated customer inquiries and withdrawals in our branch network last Friday and on Saturday of roughly $100 million, about ½ of 1% of total deposits. And while branch traffic is somewhat elevated this morning, it is substantially lower than on Saturday, and we are hopeful that this issue appropriately abates soon, so that we can focus, with our regulators involvement, on the important issue of continuing to keep Indymac Bank safe and sound through this unprecedented crisis period.

Grove Nichols
Communications Director

In my annual Shareholder Letter last February, I addressed the issue of what I then called “loan suitability,” stating that, while it is not a lender’s legal responsibility to determine whether a loan is suitable for a consumer, it is “good business” for us to help our customers to do so. I wanted to provide an update on the progress we have made in working toward this goal.

“Suitability”: Why Lenders are Different from Stock Brokers
Before I get into the details of this issue, let me first say that, while I liked the term “suitability” as it relates to whether or not a loan is right for a consumer, I have come to learn that “suitability” has a special meaning in a legal context. In particular, “suitability” often refers to the legal duty assumed by stock brokers to ensure that customers are provided financial products that fit their particular needs. Of course, there is a big difference between our role as a lender, where we are providing money to consumers and therefore assuming a substantial financial risk, and the role of the stock broker, where the broker is receiving money from consumers without any financial risk to the broker. In the latter circumstance, the courts deem it fair to assign a legal duty to the broker to assure that the investments are suitable for the customer. There is no such duty for lenders, and rightly so, given their financial stake in any loan, and the arm’s length nature of our relationship to borrowers.

The legal concept of “suitability” is also inapplicable to the lending industry because of the myriad laws in the books that already protect borrowers from improper lending practices – including laws and rules that govern everything from lender underwriting practices to the disclosures we make to our borrowers. For good reason, these laws do not require that we assume the legal responsibility to determine whether or not a mortgage is legally suitable for a consumer. To avoid confusing our programs with the term “suitability” that is used with respect to stock brokers, we will not use that term and will instead focus on putting in place a system and set of tools that will enable our borrowers to evaluate the appropriateness of their mortgage loan based on their own financial circumstances. While Indymac Bank, as the lender, has no legal responsibility to determine whether the loan is appropriate for the consumer, we strongly believe that putting in place the forms and systems that enable our borrowers to do so for themselves is the right thing to do.

Progress We Have Made in Helping Consumers Determine Whether a Mortgage Is Appropriate for Them
We are making good progress in going beyond just providing the mandatory loan disclosures to our borrowers and have been implementing our new “mortgage appropriateness” system in the following phases:

Phase One – The Basics of Your Mortgage and Shopping for the Best Deal
We have already put into production two important new voluntary forms, which we have developed ourselves, that all of our borrowers must sign:

1. “The Basics About Your Mortgage Loan”. This form (click here to see one) describes simply the key terms of the mortgage loan.
2. “Mortgage Broker Fee Disclosure Form”. This two-page form (click here to see one) shows simply and in one place the total fees that the broker is to earn, whether paid by the consumer or lender. This form also contains language encouraging the borrower to shop around and negotiate on both their loan (type, terms and pricing) as well as the fees.

Phase Two – Determining If Your Mortgage Is Appropriate for You
Phase Two will include the following additional voluntary forms to be signed by all borowers:

1. “Which Loan is Right for Me?” This form explains clearly and simply the key issues in determining whether or not a mortgage is appropriate for a borrower and outlines both Indymac’s and the borrower’s duties in the mortgage process.
    
2. We have added three one-page appendices to “The Basics About Your Mortgage Loan”.

   a. The first one, “Analyzing the Cost of Your Loan”, provides information on the effective interest rate you would be paying should you pay the loan off early. The effective interest rate is similar to the APR shown on the Truth-in-Lending statement, but this disclosure shows how the effective interest rate changes using assumptions that you pay the loan off in 1, 3, 5, 7,10 and 15 years. These calculations can’t be called APRs and they are not, but, essentially, these are what they are, and they would, as a result, more clearly show the onerous nature of paying upfront loan fees, closing costs or a prepay penalty, if you pay your mortgage off early, i.e., in the first three years, or so.

   b. The second appendix is “Analyzing Your Ability to Repay the Loan – Residual Income Analysis”. This form borrows from the old residual income test that is used in the underwriting process for VA loans and takes gross income, minus taxes (at various rates) minus total mortgage payments, including taxes and insurance, to arrive at Residual Income. It shows this Residual Income, based on the initial payment and “stressed” for the maximum potential payment the borrower may be obligated to pay over the life of the mortgage. Basically, it makes clear to borrowers that they need to be able to afford to “live” on this Residual Income even in the stressed scenario, or they should not obtain this mortgage.

   c. The third appendix is “Potential Benefits of Your Loan”. In this form Indymac provides the borrower with a listing of potential benefits that could arise from the receipt of a refinance transaction and checks off those that we believe apply to the borrower based on our analysis and assessment. Examples of how we describe the potential benefits include,
    

   “With your new loan, you are lowering your monthly mortgage payment, and this is a permanent reduction over the life of the loan as this is a fixed rate loan.”

   “With your new loan, you are increasing your monthly mortgage payment,
   but you are:

   - converting from a less stable ARM loan to a fixed rate for the life of your loan, or

   - receiving cash-out (cash in your pocket and/or cash which pays down other debts at closing), and you are lowering your overall monthly payments for your total consumer debts (including your mortgage).”

   If we do not believe there is a tangible net benefit of the loan to the borrower, we will check a box stating, “we have reviewed your loan file and we have not been able to determine there is a benefit for you in taking this loan. If you believe there is a benefit for obtaining this loan, please provide a detailed reason why you believe the loan provides a benefit for your specific financial circumstances.” At that point, it is up to borrowers to provide us in writing an explanation as to why they believe the loan provides a tangible net benefit. If they do not provide an explanation or if their explanation does not make sense to us, we will attempt to identify a loan that does provide a tangible net benefit. If we are unable to do so, we will then decline the loan.
   
    

3. Lastly, we have a two-page form titled, “Which Products Should I Choose?” This form asks some more detailed personal questions than the loan application, in multiple choice format, and then requires borrowers to reconcile those answers with the mortgage program and terms they have selected.

Our goal is to have Phase Two fully implemented in all production channels by the end of August.

Phase Three – Ensuring Borrowers Are Even Better Informed During the Closing Process
No matter how good the forms discussed above are, we, as the lender, do not control the actual closing process. A title/escrow agent or closing attorney does. Therefore, as the lender, we are still concerned that these third party closing agents, who work on a fixed fee and who must be used either as required by law (i.e., in states that require third party closing agents) or as a practical matter given a lender’s small scale of volume in many markets, will not take the time and explain properly — with the proper emphasis on key terms and conditions — all of the details of the mortgage. So, as an additional safeguard to ensure that consumers/borrowers fully understand their mortgage and are confident it is appropriate for them, in Phase Three we will be rolling out a required “script” for the first 15 minutes, or so, of the closing process and require that the closing agent review our key forms and ask and get the borrower(s) to answer key questions verbally, and we will record these questions and answers for the record, as part of each electronic loan file. For example, we will require the borrowers to answer the following types of “yes” or “no” questions:

• “Do you understand that your loan has a prepayment penalty of $5,000 that you will owe, if you pay off your mortgage within the first three years?”
• “Do you understand that your initial interest rate is 5.25% for the first 3 years and at that rate your monthly payment will be $1,657?”
• “Do you understand that, after 3 years the interest rate adjusts, and then it adjusts annually thereafter?”
• “Do you understand that the rate could increase to a maximum of 10.25%, and, at that rate, your monthly payment would be $2,688?”
• “Do you believe you can afford this payment increase?”
• “If your rate increases to the maximum rate of 10.25%, we estimate that your residual income could decline to $3,969 per month, a 21% reduction. Do you believe you can live on this reduced residual income level?”

While no Indymac representative will be present at the loan closing where the above questions will be asked, we will perform quality control reviews of the recordings to ensure that they met our requirements, and we will counsel or terminate closing agents/attorneys who do not properly comply with our questions and recording procedures.

We believe that this last phase of our loan appropriateness process will be revolutionary and will both get us as close as we can get to ensuring our borrowers obtain mortgages that are appropriate for their personal and financial circumstances and, importantly from a business standpoint for Indymac, will dramatically reduce our potential exposure to consumer litigation on this issue. We will have documented that we have given our customers the tools to thoroughly understand the mortgage they are selecting and to determine whether or not it is appropriate for them. With this system there can be no more claims that, “We didn’t understand what we were getting into”, or, “No one took the time to explain to us what we were getting into.” We expect to have a pilot version of Phase Three out in the next 90 to 120 days, and, if all goes well, for it to be implemented in all of our production channels by the end of the year.

Mortgage lenders should better enable their borrowers to make educated and informed choices regarding the loans they select and to challenge borrowers to challenge themselves with respect to the appropriateness of the loan they are choosing. In implementing the mortgage appropriateness system and set of forms outlined above, we believe we are doing just that at Indymac Bank. While it is clearly not our intention to provide a “warranty of mortgage repayment success” to our borrowers, and our system will not guarantee that our rates of delinquency and foreclosure will decline to zero, we believe that this is the right thing to do for our borrowers, that it will result in happier customers who achieve a higher rate of success with their mortgages, and that this will ultimately produce more business and better financial performance for Indymac.

Michael W. Perry
Chairman and CEO

This week, a class action lawsuit was filed against Indymac, alleging that we “issued materially false and misleading statements regarding the Company’s business and financial results.” Unfortunately, in the current housing and credit market crisis, where many financial institutions have been hit hard and seen their stock prices get hammered, class action lawsuits of this sort have become commonplace, as class action attorneys are looking for quick and lucrative settlements from companies that have insurance to protect them from these types of claims. Washington Mutual, Citigroup, Merrill Lynch and Lehman all have similar lawsuits pending, to name just a few.

We have reviewed this specific complaint, and, frankly, in our view it’s totally bogus. In a nutshell, the complaint states that we publicly discussed our business prospects and provided forecasts, and then our actual results were worse than our forecasts. The bottom line is that we have always done our best to present our business prospects and provide forecasts to our shareholders as realistically as possible, as we feel that we have that responsibility to our shareholders, and we have always stated in discussing our prospects that our actual results could differ materially from our forecasts. We have been particularly strong in our caveats in the past 18 months given the volatility of the housing and credit markets and the severity of the downturn. Frankly, many public financial services companies (many of them much larger than Indymac) have had their forecasts overwhelmed by the speed and severity of the market’s downturn. While this has had unfortunate consequences for the shareholders of many financial institutions, missing a good faith forecast which contains appropriate disclosures of risk factors does not constitute a securities law violation. We plan to vigorously defend ourselves against this lawsuit and are confident we will prevail. We have had one other similar lawsuit pending since 2007 (Tripp v. Indymac), and so far we have had the complaint in that case dismissed twice by the court.

In this environment, these kinds of lawsuits are a fact of life and a part of doing business, and there may be additional lawsuits to come. While these cases are a distraction from the important business of keeping Indymac safe and sound and returning the bank to profitability as we work our way through the housing and credit market crisis, we will fight them vigorously and are confident that we will prevail.

The fact of the matter is that the current market has been a disaster for everyone in our industry, and Indymac’s shareholders have suffered along with the shareholders of many other financial institutions. However, in contrast to some other institutions, Indymac’s key executives and board members have clearly suffered along with our shareholders, as none of our key executives or directors have sold any shares of Indymac stock since the crisis began at the beginning of 2007 and, in fact, many have made substantial purchases of stock in 2007 and 2008.

Grove Nichols
Communications Director

Summary
Indymac Bank’s total mortgage loan production in May was $2 billion, down 13% from $2.3 billion in April. This production decline was anticipated given that our pipeline of new loans in April was down 15% from March as wide mortgage spreads relative to Treasury securities continued to reduce industry loan volume. However, Indymac’s pipeline of loans in process ended May at $4.8 billion, up nearly 7% from April.

Importantly, $1.8 billion, or 88% of our May production, was eligible for sale to Fannie Mae or Freddie Mac (the GSE’s) or into Ginnie Mae securities, compared to 85% last month, with this increase being aided by a near tripling of our “Agency Jumbo” production (see highlight below). Production in our two largest channels (wholesale and retail), was over 98% agency-eligible. Of our production which was not agency-eligible, $185 million (or 75% of non-agency production) consisted of jumbo reverse mortgages and prime jumbo construction-to-perm loans (the permanent mortgage loan accompanying a previously made consumer construction loan).

May Loan Production
Click here to see our May production in detail, but here are some of the highlights:

• Our largest sales channel, the Mortgage Broker & Banker division (wholesale), had production of $921 million in May, down 14% from April.
• The Retail Lending Group (RLG) had production of $358 million in May, down 13% from April.
• The Servicing Retention group had total production of $191 million in May, down 15% from April.
• Financial Freedom, our reverse mortgage subsidiary, had total production of $315 million in May, down 10% from April.
• FHA/VA production increased 56% month-over-month, from $155 million in April to $243 million in May, and increased as a percentage of total production from 7% to 12%. FHA/VA loans represented 44% of RLG’s production.
• “Agency Jumbo” production, about which we wrote last month, increased from $24 million in April (or 1% of production) to $67 million in May (or 3% of production).

Credit Quality of May Production
The credit quality of our current production continues to be strong based on (1) expected lifetime loan loss estimates as calculated using the Standard & Poors (S&P) LEVELS model and (2) first payment defaults.

Of our total May 2008 production of $2.0 billion, $1.4 billion was evaluated against the S&P LEVELS model, and the expected lifetime loan loss rate was 0.21%. This compares with 0.17% in April, 0.17% in March, 0.23% for Q1-08 overall, 1.86% for Q1-07 overall, 0.94% for all of 2007 and 0.92% for May 2007 (a year prior). In short, the quality of our May 2008 loan production by this measure is over four times better than our production a year earlier.

(Note: Our production is evaluated using the S&P LEVELS model, version 6.3, which was released in March 2008. The data is not audited or endorsed by S&P.)

First Payment Defaults (FPDs), or the percentage of borrowers who did not make their first mortgage payment, continues to remain very low, both on an absolute basis and by historical standards. Just 0.3% of first payments were not received within 30 days in May, up slightly from 0.2% in April (which was a company record), but down significantly from 0.7% in March, 1.7% in February, 2% in January and 2.4% in Q2-07. To put these numbers into perspective, just 14 loans funded through our wholesale business failed to have their first payment post within 30 days (whether due to the customer not making the payment or to Indymac not processing it in time) and, for the second consecutive month, no loans originated by our retail business had an FPD. While FPDs can be a predictor of loans with which we may experience trouble in the future, it’s worth noting that generally 25-35% of FPDs “cure” in the subsequent month and 60-70% cure within six months.

(Note: Starting this month and going forward, we are not including construction-to-perm loans funded through our Home Construction Lending business in our calculation of FPDs because these loans were originated on average 12 months ago, under different underwriting guidelines, and are not representative of the loans we are underwriting and funding today.)

Indymac’s Actual Loan Loss Performance in Comparison to Industry Benchmarks for Alt-A and Subprime
We have received comparative industry data, as of March 31, 2008, on actual loan losses for securitized Alt-A and subprime loans from First American Loan Performance, which, as we have stated before, is considered the best and most objective data of issuer performance in the industry. Click here to see how Indymac compares with our industry in detail, but here are the highlights: Indymac’s cumulative Alt-A loss experience was 22 basis points (BPs) through March 31. Although this was up from 8 BPs at the end of Q4-07, it remains lower than the industry’s cumulative Alt-A loss experience of 25 BPs. Further, while the Alt-A loss experience for both Indymac and the industry has increased considerably in 2008, it remains at a significantly lower level relative to the industry’s cumulative subprime loss experience. The cumulative subprime loss experience for the industry, at 226 BPs through March 31, 2008, is 9 times greater than the industry’s Alt-A loss experience and 10.3 times greater than Indymac’s Alt-A loss experience. While Indymac produced 7.1% of the industry’s total Alt-A production for the period measured (2002 to Q1-08), our subprime lending made up less than 3% of our production and 0.89% of the industry’s total subprime production. While Indymac was a leading Alt-A lender, prior to changing our production model to an almost entirely GSE-FHA/VA platform, we were not even ranked among the top 25 subprime lenders by National Mortgage News for the period 2005-2007.

Grove Nichols
Communications Director

A web-based article published last Friday by MarketWatch titled “Bank failures to surge in coming years” contained some materially inaccurate information regarding Indymac Bank that we wanted to clear up.

The article cites as a principal source a research report by RBC Capital Markets dated May 21, 2008, in which RBC uses what they call their “Texas Ratio” – a calculation of non-performing assets (NPAs) divided by tangible capital plus allowance for loan losses – as an indicator to determine if a bank will fail. The report goes on to say, “We created the Texas Ratio (from our experience with Texas banks in the 1980s and the Northeast banks in the 1990s) to give investors an idea of banks that are or could be facing serious ongoing concern issues. The companies with ratios in excess of 100% combined with an NPA ratio greater than 10% have a higher probability of failure, in our opinion.”

The MarketWatch article states that Indymac has a Texas Ratio of “around 140%”, which is materially inaccurate. First, RBC used our GAAP common equity for Indymac Bancorp versus our regulatory capital for Indymac Bank. Clearly, using bank regulatory capital rather than holding company GAAP equity is more appropriate in measuring the health of a bank. As of March 31, 2008 our GAAP common equity at Indymac Bancorp was $959 million, significantly lower (by roughly 50%) than our regulatory Tier 1 capital of $1.84 billion at Indymac Bank. The difference is the result of two factors: we issued Trust Preferred Securities (at Indymac Bancorp and contributed this capital as common equity to Indymac Bank) and Non-cumulative Perpetual Preferred Securities at the Bank level (which counts as Tier 1 regulatory capital but is not included in common equity at either the bank or the holding company); and we have cumulative temporary unrealized losses on our mortgage-backed securities, which reduce GAAP common equity (at both the bank and the holding company) but do not reduce Tier 1 regulatory capital. Clearly, using Indymac Bank’s Tier 1 regulatory capital would appropriately lower our “Texas Ratio” (and lower our indicated risk level) significantly.

In addition, because Indymac Bank was a large mortgage banker and had a lot of home loans it could not sell when the secondary market collapsed in the 3rd quarter of last year, we transferred $10.3 billion of loans from held-for-sale to held-for-investment (HFI) in Q4-07, increasing our loans HFI by roughly 160%. Before we transferred these loans, we had established $474 million of “credit marks” against them (which are exactly the same, economically, as loan loss reserves), but these credit marks do not show up in our financial statements as loan loss reserves (they show up as a discount to the loan balance). These credit marks represented 4.6% of the transferred balances and now represent roughly 50% of the total credit reserves we hold against loans HFI. Having 50% of our HFI credit reserves in credit marks such as this is a much higher percentage than at most other financial institutions in America (with the possible exception of the GSEs), which don’t have the extensive mortgage banking operations we have at Indymac.

If you take our regulatory capital of $1.84 billion and add to that our actual loan loss reserves of $483 million and our credit marks on loans which now total $480 million as of March 31, 2008, our “cushion” against future losses totals $2.8 billion. With NPAs at March 31 of $2.1 billion, Indymac Bank’s “Texas Ratio” is actually 75%, not the 140% cited in the MarketWatch article. In addition, we have $188 million in a secondary market reserve plus $121 million in valuation reserves on REO (as well as significant charged-off amounts on other non-performing loans), adding up to reserves of nearly $1.3 billion. Adding these reserves to our Tier 1 regulatory capital, our Texas Ratio declines further to 68%.

Our total credit reserves against HFI loans of $963 million are 46% of NPAs, and this does not include the secondary market reserve and REO valuation reserves. Our Q108 realized credit losses on HFI loans were $123 million, giving us 7.8 quarters worth of reserves, which we believe to be a strong cushion against future losses. While commercial banks generally hold higher reserves as a percentage of NPAs than thrifts, their higher reserve percentages are needed because more of a commercial bank’s loans are unsecured (credit cards, commercial, auto, etc.) or home equity loans, all of which have roughly 100% loss severities versus Indymac’s predominantly 1st lien single family portfolio. To put this point into further context, an article in the Wall Street Journal yesterday said that Freddie Mac’s credit reserves are 17.1% of NPAs and Fannie Mae’s are 16% as of the end of the 1st quarter, which might be because they also have credit marks that don’t get accounted for as traditional loan loss reserves.

The MarketWatch article goes on to say, “When lenders need to raise new [funds], they can try to boost deposits by offering attractive interest rates on certificates of deposits, or CDs. IndyMac is currently offering the highest rates on one-year CDs, according to Bankrate.com.” The fact is that Indymac’s operating liquidity remains very good. We had $4.9 billion of operating liquidity as of the close of business last Friday May 23, up somewhat from the $4.1 billion we had at March 31. We are targeting to stay around this $4 billion level, but, in reality, longer-term we don’t need this much liquidity given we had $4 billion in liquidity a year ago, and today we are funding roughly 1/3rd the monthly loan volume, our current loan production is all very liquid GSE/FHA/VA volume, and we have no market funding sources (which can dry up quickly, as many lenders have experienced in the past year). Last year at this time, we had roughly $3 billion of market funding (about half in a secured commercial paper program and the other half in reverse repurchase facilities), and we have paid off all of these.

With respect to the rates we pay on deposits, as a result of the illiquidity in the capital markets for any mortgage related assets (and other types of assets also, such as student loans), there has been tremendous competition from all depositories to raise insured deposits (96%+ of our deposits are fully insured by the FDIC). Our deposit pricing strategy is that we set our rates generally well below the top rate payers among our key competitors for each product and term, except that we usually have one promotional rate for a specific product/term/channel at any one time. The MarketWatch article noted that in one product and for one term for one channel (a one year CD for new money on the web), we happened to be the highest rate payer on Bankrate.com last Thursday, with a rate of 4.05%. Countrywide was also paying 4.05%, but did not post to Bankrate. To illustrate where our rates are in comparison to other major financial institutions, our 9-month CD rate is currently 2.40% versus 2.70% at Bank of America;; our 2-year CD rate is 2.40% versus 4.35% at Countrywide; our 4-year CD rate is 3.00% versus 4.25% at Washington Mutual; and our 5-year CD rate is 3.00% versus 4.75% at Wachovia.

In summary, safety and soundness remains our highest priority at Indymac Bank during these challenging times, and we remain in a solid overall financial position. With $1.84 billion in Tier 1 regulatory capital, our capital ratios exceeded the levels defined as ‘well capitalized’ by our regulators as of March 31, 2008. We continue to maintain strong total operating liquidity in excess of $4 billion. We have total credit reserves of $2.7 billion at March 31, including $1.4 billion embedded in the valuation of our non-investment grade and residual securities. Actual realized credit losses during the first quarter totaled $334 million, such that our total reserves equate to 8.0 times current quarterly realized credit losses.

Grove Nichols
Communications Director

In today’s housing and credit market crisis, where home values and credit scores are falling and combined loan-to-value ratios (CLTVs) are rising among many Home Equity Line of Credit (HELOC) borrowers, many lenders and servicers are prudently and responsibly exercising their contractual rights and freezing or cutting borrowers’ available credit under their HELOCs.

While Indymac has never been a big HELOC lender, we want to explain our policies and practices with respect to both the origination of these loans and the actions we have been taking in freezing or reducing HELOC limits for some of our customers.

Originating HELOCs at Indymac
The HELOC market has always been a limited documentation market, where loans are underwritten based on limited or no documentation of the borrower’s income or assets, as is, and always has been the case, in the credit card and auto loan industries. In originating HELOCs, Indymac has followed established lending practices of the industry, underwriting these loans based on two main criteria: credit worthiness, as determined by the borrower’s credit score (FICO), and the CLTV on the property securing the loan, as determined by appraisal or automated valuation model (AVM). The big difference between home equity lending and credit card lending, of course, is that home equity lending is supported by a lien on the borrower’s residence, whereas credit card lending is generally unsecured, making HELOCs considerably less risky than credit cards from the lender’s standpoint.

As we said, Indymac has never been a big HELOC lender, and our total por