Closure of this profitable lender is surreal
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On this side of the Atlantic where 30-year fixed rate mortgages can still be had at less than 4%, Charlie Brown, Snoopy and the rest of the gang from the classic cartoon strip Peanuts, have given residential lending the boot.
Let me translate - Metropolitan Life, one of the largest insurance companies in the land which markets its products using cartoonist Charles Schulz’s Peanuts characters - is closing its residential lending division.
Why, you may ask? Was the Texas-based MetLife Home Loans bleeding red ink, a victim of lax lending standards that led to the US’ subsequent sub-prime meltdown and housing bust?
The answer is an emphatic no. MetLife Home Loans was profitable. It was only four years old. In 1998 MetLife, the parent insurance company, bought 200 branches and a medium-sized servicing portfolio from a Texas bank called First Horizon, and then carefully grew the business. No sub-prime loans were involved and it bought at the bottom of the market.
By early 2011 MetLife Home Loans could boast that it was the 12th largest lender in the country. It had expanded into warehouse finance, making loans to non-banks and racking up $1bn in commitments.
It also ventured into reverse lending. In theory, it was assumed that the insurance conglomerate would then cross-sell its multiple insurance products to its mortgage clients.
On the outside, everything looked fine at MetLife Home Loans. Then last summer MetLife said it would sell its commercial bank, clarifying that it planned to stay in mortgage lending through MetLife Home Loans. A few weeks later it changed its mind on mortgages. What happened?
That’s hard to say since company executives aren’t saying much. But most clues point to Steve Kandarian who was promoted to chief executive officer of the parent last March.
The general belief is that he looked at the risk/rewards of both banking and mortgages - not to mention all the new regulatory burdens and costs ushered in under the Dodd-Frank Act - and concluded that MetLife could make a better return elsewhere.
So out the window went mortgage banking. General Electric has already agreed to buy the bank, a wholesale lender that funded the mortgage firm.
MetLife tried to sell MetLife Home Loans and although there were a handful of bidders no-one wanted to pay for the origination platform, that is the 200 branches and all the people who worked in them. That’s what happens when you’re looking at a down year for loan production.
In short order, MetLife in early January announced to the world that MetLife Home Loans would be shuttered, but not all of it. For now, MetLife is keeping the reverse lending business, which makes lines of credit available to senior citizens.
It is also holding onto its $85bn servicing portfolio for the simple reason that the market for housing receivables is in the tank and probably will be for two more years.
MetLife expects to take a $100m charge for closing the mortgage business. When it sells the $85bn in mortgage servicing rights it could clear anywhere from $400m to $800m. So the mortgage business that never lost money for MetLife will in the end make a profit.
It seems strange - not like a Peanuts comic strip at all, but more like another popular cultural artifact, The Twilight Zone television show where odd and supernatural things occur. I guess this fits.
Others reduce exposure too
While insurance giant MetLife puts the finishing touches on its exit from the mortgage business, a handful of established megabanks continue to pare back their presence in residential finance - but in different ways.
A few weeks back Bank of America officially closed its correspondent mortgage division, through which it bought already-funded mortgages from other lenders.
Under its correspondent strategy, Bank of America not only bought mortgages from non-bank lenders but also provided warehouse lines of credit to them.
Two years ago Bank of America was the nation’s largest lender. Today it is number four and slipping fast.
Many correspondent buyers have warehouse affiliates whereby they can offer one-stop shopping to their clients.
Although Bank of America exited correspondent at the year end, it continues to manage a once large but shrinking warehouse business - but it has shifted the task to its Wall Street division at Merrill Lynch & Co.
Meanwhile, on the first day of February, CitiMortgage, the nation’s fourth largest residential funder, shocked the market somewhat by announcing that it would no longer originate mortgages through loan brokers.
Then again, Citi - which was once large in this channel - was not all that active anymore.
The bank funded $1.5bn of home mortgages through brokers in Q3.
Table funding, as it’s known, accounts for just 9% of its total home loan production.
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