MetLife Replaces BofA in Mortgage Venture as Bank Scales Back Amid Losses
Stock Chart for MetLife Inc (MET)
MetLife Inc. (MET), the life insurer that uses television ads to sell loans to older homeowners, replaced Bank of America Corp. (BAC) in a mortgage-distribution deal that will offer access to younger borrowers.
MetLife’s banking unit agreed to become the “preferred mortgage lender” of KB Home, the Los Angeles-based homebuilder that targets first-time buyers. The deal, announced yesterday by KB Home, comes as the builder winds down a mortgage joint venture with Bank of America, the biggest U.S. bank by assets and deposits.
MetLife is lending more as near-record low interest rates pressure returns on insurance products. Employment at its MetLife Bank unit have surged, while lenders like Bank of America scale back amid losses on loans issued during the pre- 2008 housing boom. MetLife’s growth may explain why KB Home (KBH) selected the company instead of a bank with a more recognized brand, said Michael G. Smith, an analyst with JMP Securities.
“The trickiest part for a homebuilder is getting people qualified for a mortgage,” said Smith, who has a “market outperform” rating on KB Home. “Maybe Bank of America just thought it’s not worth it anymore. Then you get MetLife coming in saying, ‘Well, we’re trying to get into the business.’”
The switch to MetLife relieves KB Home of its reliance on a bank that diverted staff from lending to deal with soured assets and accusations of fraud. KB Home said in January that its results could suffer if new regulations or disputes with investors require Bank of America to curtail lending.
“Our home sales and our homebuilding and financial services results of operations may be adversely affected,” the homebuilder said in its annual regulatory filing.
The number of loans issued by Bank of America’s venture with KB Home fell to 5,706 in 2010 from 10,141 in 2008. Bank of America, which inherited the partnership when it acquired subprime specialist Countrywide Financial in 2008, informed KB Home in the first quarter that it planned to exit the arrangement.
The venture ceased accepting loan applications on June 27, KB Home said yesterday in a regulatory filing. Terry Francisco, a spokesman for Bank of America, said changes in regulation prompted the lender to terminate the joint venture and that KB Home rejected a proposal to continue under a new agreement.
“We are disappointed with KB Home’s decision,” Francisco said. The joint venture accounted for less than 1 percent of Bank of America’s more than $300 billion in mortgages last year, Francisco said.
MetLife jumped ahead of Bank of America this year to become the second-biggest U.S. seller of reverse mortgages, which are home equity-backed loans to borrowers aged 62 or older. Bank of America exited that business in February, saying the staff and resources used by the operation were needed in other parts of the company. New York-based MetLife ran commercials for reverse mortgages this week on CNBC and Fox Business channels.
“MetLife is a strong, consumer-friendly company with an outstanding reputation for customer service,” KB Home Chief Executive Officer Jeffrey Mezger said yesterday on a conference call with analysts to discuss financial results. KB Home fell the most in more than two years in New York trading yesterday after the second-quarter net loss widened to $68.5 million.
Bank of America reported a $2.2 billion loss last year after settling with investors who accused the bank of selling loans based on fraudulent data. The company said yesterday it agreed to pay $8.5 billion to resolve further claims.
“It is not inconceivable to me that KB Home maybe decided that being branded with BofA, given how many bad headlines they seem to get on the mortgage side, may not be the best long-term business,” said Thomas Lawler, founder of Lawler Economic & Housing Consulting.
The biggest U.S. lenders are facing tighter capital requirements from the Dodd-Frank Wall Street regulatory overhaul. Life insurers are seeking exemptions from the new rules to account for how their business differs from banking.
MetLife, led by CEO Steven Kandarian, gained $1.43, or 3.4 percent, to $43.46 yesterday. Bank of America rose 32 cents, or 3 percent, to $11.14.
Ted Mitchell, a spokesman for MetLife, didn’t respond to a request for an interview with MetLife Bank President Donna DeMaio. Prudential Financial Inc., the second-biggest U.S. life insurer behind MetLife, doesn’t issue residential mortgages.
MetLife Bank sells the mortgages it issues and makes servicing fees by charging investors to monitor the home collateral and ensure terms of the contracts are met. The company had $15.6 billion of assets as of March 31, according to the Federal Deposit Insurance Corp. Bank of America’s biggest FDIC-regulated subsidiary had $1.5 trillion.
The expansion of MetLife Bank gives its parent a hedge against declines in investment yields because more borrowers refinance mortgages when rates are low, MetLife has said. The insurer held more than $300 billion of fixed-income securities at the end of March.
The yield on two-year U.S. Treasuries slid to 0.461 yesterday from 2.625 percent on June 29, 2008. The yield hit a record low of 0.31 percent on Nov. 4. The two-year note’s average yield over the past 10 years was more than 2.5 percent.
The employee count at MetLife Bank rose to 4,985 at the end of March from 3,768 a year earlier, according to the FDIC. The worker count was 85 at the end of 2007. Net income at MetLife Bank was little changed last year at $218 million. That’s less than 10 percent of MetLife’s total.
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