National City Haunted by Credit Concerns From the Past

National City Corp. here has recently been downgraded by several equity analysts in the wake of growing concern about a hangover from its days as parent of First Franklin.

While NC has scaled back its involvement in subprime and home-equity lending, a portfolio of loans that were not sold when Merrill Lynch bought First Franklin from NC continues to worry some company observers.

In its annual 10-K filing with the SEC, NC said the credit trends in its "core commercial and consumer portfolios" continue to be stable. But the company's "runoff" portfolios are another matter. NC reported seeing some increase in delinquency and loss rates that it described as being consistent with a decreasing portfolio balance and stress in the housing market from its national home-equity and nonconforming mortgage portfolios.

The company also disclosed that some $2.2 billion in second mortgages is covered under lender-paid mortgage insurance policies written by two different companies, one of which has disputed some claims made by NC. As previously reported by MSN, NC has threatened legal action against the carrier.

NC said it may have to increase its allowance for loan losses as the dispute is resolved, estimating that the allowance may have to be raised by $50 million. It reported having $8.9 billion of residential real estate loans in its "held for sale" portfolio in February. Of these, $1.7 billion are from the former First Franklin unit. An additional $2.8 billion of home-equity lines of credit were also in the held-for-sale portfolio.

NC said that while delinquency and loss rates in the runoff portfolio have been rising, they are still at levels consistent with the company's year-end loss reserve expectations. NC said that a series of residential development and construction loans, totaling $46 million, constituted its largest nonperforming exposure at the end of 2006. However, the company planned to sell this portfolio before the end of the first quarter.

Nonetheless, the company's annual 10-K filing shows that nonperforming, residential real estate loans have been rising. NC had $250 million in residential real estate non-performers as of February, up from $179 million a year earlier.

The company has also seen the number of loans 90 days or more past due rise, both in the real estate and other sectors. The company had just over $1 billion of loans in the 90-day-plus category in February, up from $672 million a year earlier.

(c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com