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National City won't sell $1.6B in subprime loans

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By Thomas Olson
Friday, March 16, 2007

The quaking U.S. market for subprime mortgage loans is rattling National City Corp. too.

The parent of National City Bank of Pennsylvania has decided it won't try to sell $1.6 billion in subprime loans after all, due to "adverse market conditions," National City said in a securities filing Thursday. The loans "are currently not saleable at what management considers an acceptable price," the bank said.

Instead, Cleveland-based National City took a write-down of $11 million in February, and sometime this month will return to its portfolio the loans it had intended to sell. "A further write-down is likely," the filing said. Spokeswoman Kristen Adams would not elaborate.

Subprime mortgages are high-cost loans made to homebuyers with financial problems.

Additionally, National City expects to add "on the order of $50 million" to its reserves for possible loan losses, the filing said.

In response, some bank analysts lowered their per-share earnings estimates for National City. Punk Ziegel analyst Richard Bove, for instance, cut his 2007 estimate to $3.01 from $3.16, and his 2008 estimate to $3.24 from $3.47.

The reversal occurs after National City in January completed a $1.3 billion sale of its subprime lending business -- First Franklin, of San Jose, Calif. -- to Merrill Lynch & Co., New York.

Merrill Lynch also acquired National City Home Loan Services, based in Allegheny Center on Pittsburgh's North Side. It processes mortgage payments, taxes and related documents for about $38 billion worth of subprime loans. Of them, $18 billion were originated by First Franklin.

The business employs about 300 at Allegheny Center, plus 356 at a call center along Boyce Road in Upper St. Clair. Merrill Lynch spokesman Bill Halldin said no changes were planned for the local work force at Home Loans Services, as the business is called.

Halldin would not comment about the performance of the First Franklin subprime portfolio it acquired. But as a mortgage broker, Merrill Lynch traditionally resells loans, rather than retaining them for long periods.

When National City sold the First Franklin business, it shut down a separate unit that originated subprime loans. The closure of Preferred Advantage on Jan. 3 cost 50 jobs, also at Allegheny Center.

National City shares closed yesterday at $35.99, up 30 cents.

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