National City Corp. last week announced it may succumb to the low profits and high risk that have plagued the U.S. subprime lending industry in recent years. The Cleveland-based bank said it is considering the sale of its subprime mortgage unit First Franklin Financial Corp., along with Pittsburgh-based mortgage servicing affiliate National City Home Loan Services Inc.
Friedman Billings Ramsey analyst Gary Townsend last week estimated the subprime lender would sell for $800 million to $1.2 billion based on its $773 million book value.
First Franklin's loan portfolio stood at $18.3 billion at the end of the first quarter, compared with $18.7 billion at yearend. National City, which is slated to decide on the sale by the end of the summer, first acquired the subprime unit for $266.1 million from Bank of America Corp. - which also chose to follow the high-in-credit road National City may soon be headed down. First Franklin's profit margins hit an all-time low at the end of 2005, when origination and sales revenue fell to $264 million from $417 million.
The company retained 16% of its originations in the first quarter, compared to 30% in the year-earlier period. Home equity lines and loans retained in the portfolio were $10.6 billion as of March. The company stated in its 10Q for the first quarter plans to "sell or securitize most of its National Home Equity and First Franklin production in future periods."
As subprime lenders have been hit by a higher cost of money, dwindling origination volumes and subsequently intense competition - an increasing number are expected to either consolidate or put themselves on the block, according to industry analysts. A number of subprime lenders have downsized operations, notably ACC Capital Corp. and in May, Accredited Home Lenders agreed to acquire the ailing Aames Investment Corp. for $340 million. (ASR, 06/05/06)
While subprime origination volume in 1Q06 was the second-largest first quarter on record, according to RBS Greenwich Capital, half a dozen lenders posted declining origination volumes year-over-year. Ameriquest Mortgage Corp. led the drop, with its originations falling 53%, followed by National City, which posted a 37% decline, and General Motors Acceptance Corp., which experienced a 28% decline.
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