National City Takes Charges on Residuals

In the fourth quarter of last year, National City Corp. booked a big gain on the sale of its subprime home loan unit, but in the first quarter of 2007, that same transaction resulted in some charges to the company's earnings.

First Franklin, which sold both its First Franklin loan origination and servicing platforms in the fourth quarter, boosted fourth-quarter earnings by $1 per share on the First Franklin sale, but that's a nonrecurring gain. Charges related to National City's retained interest in the subprime mortgage portfolio from First Franklin did recur, however. The company took charges against its retained interest in the fourth quarter, and now the company's first-quarter results include further charges against that retained interest.

National City sold San Jose, Calif.-based First Franklin and related units to Merrill Lynch for $1.3 billion in a deal that closed in December.

Since late 2005, First Franklin's strategy has been to "originate and sell" nonconforming mortgages and home-equity loans and lines that are outside of its banking footprint. That contributed to a decline in first-quarter net interest income, the company said. It expects its remaining portfolio of nonprime home loans, home-equity loans and home-equity lines of credit to continue to decline.

In addition, First Franklin shifted $6 billion of nonconforming mortgage loans from its investment portfolio to its "held for sale" account in the latter part of last year. Approximately $4 billion of that has been sold.

However, citing "unfavorable market conditions," a remaining balance of $1.6 billion has been transferred back into the bank's investment account.

In terms of credit quality, National City continues to have a dispute with a mortgage insurer over "a meaningful number" of claims filed by the company. National City said it has changed its charge-off practices and loss forecasting to reflect an assumed loss of insurance coverage for the loans in dispute, a move that cost the company $20 million in additional provisions for loan losses. Also, National City said that an insurance dispute caused $24 million of charge-offs in the first quarter. The company's total charge-off amount for nonconforming mortgages was $53 million.

The company's mortgage servicing business also produced less revenue in the first quarter, reflecting National City's decision to sell its nonconforming mortgage servicing business. Servicing revenue totaled $32 million in the first quarter of 2007, down from $52 million in the first quarter of last year. The loss of servicing revenue from the unit that was sold accounted for the decline, the company said.

The company also reported hedging losses in the first quarter.

National City said its mortgage banking line of business earned $2 million in the first quarter overall, down sharply from the fourth quarter but an improvement over the loss posted in the first quarter of last year.

Chairman and CEO David Daberko admitted that first-quarter results were "mixed" in the company's earnings release.

"Our mortgage business continues to operate in a difficult environment, but we have less exposure to the mortgage sector than in prior years. Overall, we expect each successive quarter from here to show improved earnings," Mr. Daberko said.

Overall, National City Corp. earned $319 million, or $0.50 per share, in the first quarter. That was down from $459 million of net income during the first quarter of last year.

Investors reacted negatively to the news, with the company's share prices falling nearly 2% in the hours after National City released its first-quarter financial results.

Snapshot: national city's first quarter mortgage charges

Charge-Offs $53 Million

Writedowns on Loans Held for Sale $28 Million

Loans Shifted Back to Investment Account $1.6 Billion

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

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