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NatCity Takes MSR Hedge Loss

National City Corp. here took a $115 million hit in the second quarter due to hedging losses on its residential servicing portfolio.

The company - which is contemplating exiting the subprime business - has taken $243 million in servicing-related hedging losses so far this year.

The entire bank, overall, earned $473 million in the quarter but its "A" paper mortgage unit lost $52 million. Its residential subprime business, though, had a strong second quarter, posting a $148 million profit. (Its net mortgage profit for the quarter was $96 million.)

One analyst, requesting anonymity, said it seems "odd" that the bank is exiting the subprime business when it appears to be so profitable.

Moreover, Sandler O'Neill increased its earnings estimates for the bank, citing "better than expected" results from First Franklin Financial Corp., the subprime production unit.

NatCity has adopted a policy of selling into the secondary market all subprime loans funded by First Franklin.

During a conference call on Tuesday, company officials blamed the hedging losses on the implementation of a new model to estimate mortgage loan prepayments. In a statement it notes that prepayments "are a significant factor" in determining the asset value of MSRs. Even though the bank may sell First Franklin, it called the company a "fabulous" business.

NatCity bought First Franklin from its founder, Bill Dallas, in 1999. "It's a better business today than when we bought it," said one bank official. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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