MetLife Inc.'s decision to shutter its huge home lending unit after trying to sell it shows bankers still consider this business radioactively risky five years into the housing slump.
"Banks at the end of the cycle don't want mortgage," says Bill Dallas, the chairman and chief executive of Skyline Financial Corp., an Agoura Hills, Calif. mortgage bank. What was once considered "the safest asset class on the planet has been declared toxic," he says.
On Tuesday MetLife announced that its Irving, Tex., home loans unit will shut its doors, eliminating 4,300 jobs. The insurance company will take a $90 million to $100 million after-tax charge for closing the business, which it had put on the block in October.
"It's hard to sell a mortgage company right now because the bid levels are probably below what your cash value is," says Cameron Findlay, chief economist at LendingTree, a unit of Tree.com Inc. (which agreed in May to sell its mortgage origination subsidiary, Home Loan Center, to Discover Financial Services).
Potential buyers of mortgage operations are afraid to take on the risk of having to repurchase soured loans from investors, Findlay says. "That really hurts on the trading side with multiples and valuations. Buyers think they're better off putting capital to work some other way."
Steven A. Kandarian, who became MetLife's president and chief executive officer in May, has led a retreat from the banking business and its regulatory burdens. MetLife is already positioned to be marked by regulators as a systemically important financial institution and thus subject to upcoming Basel III requirements to hold higher capital levels.
In late December, MetLife agreed to sell $7.5 billion of its roughly $10.7 billion in deposits to GE Capital Finance Inc. for an undisclosed price. The deal is expected to close in the second quarter. MetLife's entire retail banking business, including mortgages, accounted for less than 2% of operating earnings in the third quarter.
MetLife has said it plans to keep its reverse mortgage business because it complements other insurance products that it sells to seniors. There is speculation that it may close its warehouse lending unit, which had about $1 billion in commitments at year-end, if it cannot find a buyer. The company also is engaging offers for its $85 billion servicing unit, insiders say.
But MetLife has suffered from bad timing since its announcement in October that it planned to get out of the mortgage business.
A drop in mortgage lending volumes to the lowest levels in over a decade has forced other lenders to cut costs and staff. Big mortgage players, including Bank of America Corp. and Ally Financial Inc., have pulled back on correspondent lending and other operations in the face of regulatory scrutiny, bond investors' lawsuits, and the dismal state of the housing market.
Dave C. Stephens, the chief operating and financial officer at United Capital Markets Inc., a Denver company that hedges mortgage servicing rights, says MetLife did not have much to sell beyond its people.
"Nobody today would pay for a production platform," Stephens says. "When [mortgage] volumes are down producers are looking for a place to land so you just hire them, you don't have to assume any losses, leases or corporate responsibilities."
If buyers believe that even an income-generating lending unit isn't worth acquiring, it's hard to see why investors would ascribe more value to other banks' existing operations. That seems like an overreaction, though -- have people forgot this business is highly cyclical? -- Jeff Horwitz, American Banker.