MetLife Inc., the life insurer that’s eliminating most of the 4,300 jobs at its mortgage unit and selling deposits to reduce federal oversight, is finding it harder to escape risk from home loans.
The loan-servicing operation is bracing itself for fines from the Federal Reserve tied to foreclosure practices and may face penalties from other regulators, according to the New York-based insurer’s annual report. Fitch Ratings said last month that MetLife used dubious appraisals for mortgages that were packaged into a bond sale, the type of underwriting flaw that investors may cite to demand a company repurchase the debt.
Chief Executive Officer Steven Kandarian is seeking to exit what the company called a “small, little bank” after the unit subjected the insurer to oversight from federal regulators who twice rejected his plan for a dividend increase. MetLife continues to bear repurchase risk tied to about $60 billion in mortgages issued starting in 2008, even as Kandarian focuses on expanding life insurance sales in Asia and Latin America.
Insurers “tend to be conservative and they don’t like unknowns and I don’t blame them,” said Terry Wakefield, a mortgage industry consultant in Mequon, Wisconsin, who helped start a home lending unit for a Prudential Financial Inc. predecessor. “MetLife found themselves in a position that they never anticipated when they got into the business.”
Lenders led by Bank of America Corp. and JPMorgan Chase & Co. have suffered more than $72 billion in costs from faulty underwriting and shoddy foreclosures after the housing market collapsed. Morgan Stanley was ordered by the Fed last week to review foreclosures conducted by its Saxon servicer before it agreed to sell the unit, and compensate injured borrowers.
MetLife’s originations were a smaller part of the company’s business and were mostly arranged after housing began to slump. Its reserves for violations of so-called representations and warranties made about the quality of sold loans totaled $69 million on Dec. 31, or $13 million higher than a year earlier.
The “risk they have due to mortgage origination will linger,” said Alan Devlin, an analyst at Atlantic Equities LLP. “But I don’t think the risk will be significant for them.”
The bank unit, which services about 1 percent of U.S. home loans, posted third-quarter operating earnings of $51 million, accounting for 4.3 percent of MetLife’s total. In the fourth quarter, it reported a portion of the bank’s operating results along with divested businesses.
The Fed fined five lenders $766.5 million in February for servicing mistakes and said six more firms previously cited for deficiencies would face penalties. The regulator didn’t “identify these six institutions, but MetLife Inc. is among the institutions that entered into consent decrees” with the Fed last year, the firm said in a February filing.
Department of Justice
MetLife’s bank also met with the Department of Justice regarding mortgage servicing and foreclosure practices and may face fines from state and federal enforcement authorities, the company said. The Fed hasn’t contacted MetLife regarding a fine, said John Calagna, a spokesman for the firm.
MetLife CEO Kandarian, who was promoted to the job in May, has been retreating from banking to avoid the stronger federal oversight imposed on deposit-takers after the 2008 financial crisis. The Fed last month rejected his plan to buy back stock because it determined the firm would fall short of a capital standard in a severe economic downturn. The regulator also blocked MetLife from increasing its annual dividend last year.
The insurer rose 1.7 percent to $35.45 at 10:34 a.m. in New York, extending gains this year to 13.7 percent. It declined 30 percent in 2011.
The company started MetLife Bank in 2001, to complement the insurance business. The business could serve as a “natural hedge” when interest rates declined, it said in 2010.
It purchased the mortgage unit of First Horizon National Corp., the Memphis, Tennessee-based bank, in 2008 to expand in home loans as established competitors scaled back or failed, putting it among the 10 largest lenders. In 2010, it hired Brian Hale, the former managing director of national production at Countrywide Financial Corp., the top-ranked mortgage lender before the housing slump, to lead the business.
In January, it said it would stop originating mortgages, eliminating most of the unit’s 4,300 of employees, after a failed attempt to sell the lender. MetLife said the move could cost as much as $110 million. It retained a servicer that oversees about $82 billion of home loans and continues to make so-called reverse mortgages used by seniors to tap home equity.
In December, the insurer agreed to sell about $7.5 billion of its approximately $11 billion in deposits to General Electric Co. MetLife Bank had $25.5 billion of assets as of Dec. 31, according to Federal Deposit Insurance Corp.
The company has sold about $3 billion of so-called jumbo mortgages in a series of auctions this year as part of the retreat, according to two people familiar with the sales, who declined to be identified because the transactions were private. Most have been bought by other banks, they said.
Jumbo home loans are ones larger than allowed in government-supported programs, currently as much as $729,750 for single-family properties in some areas. Limits range from $417,000 to $625,500 for Fannie Mae and Freddie Mac loans with the lowest costs for borrowers using 20 percent down payments.
About $600 million of the MetLife mortgages ended up in a March transaction by Credit Suisse Group AG that bundled a total of $741 million of loans into securities.
Fitch said in a March 29 report there were “certain irregularities” in MetLife’s practices, after reviewing the deal. It “ultimately” wasn’t asked to rate the transaction because its potential grades were considered too low, the credit assessor said in an e-mailed statement.
“Notably, in cases where MetLife’s origination guidelines called for more than one appraisal to be obtained, the lowest valued appraisal was not uniformly used to determine eligibility,” Fitch said.
A due diligence firm’s assessment also showed that 8.4 percent of the total loan pool was MetLife mortgages whose property valuations couldn’t be supported, according to Fitch. DBRS Ltd., which rated the bonds, said that reviews of the insurer’s “underwriting guidelines and third-party due diligence resulted in more conservative assumptions being applied to loss rates.”
“We disagreed with the Fitch report,” MetLife’s Calagna said in a statement. The bank “maintained a robust risk management group that included a collateral risk management department consisting of over 30 licensed appraisers,” he said. When two valuations were required, usually for loans of more than $1.5 million, those individuals “reconciled the two appraisals using numerous automated tools and local market expertise,” he said. “The approach taken by MetLife exceeds what other lenders are generally doing.”
None of the $268.6 million of fixed-rate jumbo mortgages issued by MetLife in 2010, still outstanding and held by the insurer in February were delinquent that month, according to a DBRS report. Only 0.3 percent of the $842.9 million of loans from 2011 were 30 days late or more.
MetLife is also more protected against repurchases than most lenders who have contributed loans to mortgage securitizations since the market revived in 2010 because it didn’t agree to binding arbitration when there are disputes, said Rui Pereira, a managing director at Fitch.
That means bond investors would need to take the insurer to court and “we’ve seen how that’s played in the recent crisis,” he said in a telephone interview, referring to the legal battles being waged by lenders such as Bank of America.
‘Could be Terrible’
Potential flaws in the jumbo loans that MetLife had retained in its portfolio may signal worse practices for debt it sold to government-supported Fannie Mae and Freddie Mac, or got insured by the Federal Housing Administration, said Brad Golding, managing director at Christofferson, Robb & Co. Those entities often have stronger rights to force repurchases.
“If their portfolio product is bad, the product they meant to be selling could be terrible,” said Golding, whose New York-based hedge fund manages about $1.4 billion.
Bank of America, which bought Countrywide in 2008, and JPMorgan have seen the biggest losses since 2007 from home loans apart from the costs stemming from debt they own, according to the data compiled by Bloomberg. The banks are suffering mainly from buyback demands tied to loans issued before bad lending sparked a collapse in the mortgage market and U.S. home prices.
Loans made since 2008 were originated in “the most conservative of times” in comparison with mortgages from the three years before that, said David Lykken, managing partner at Mortgage Banking Solutions, an Austin, Texas-based consulting firm.
Even so, JPMorgan last year received repurchase requests on $1.6 billion of loans made in 2008 or later, out of a total of $5.4 billion of demands, as loan buyers such as government-supported Fannie Mae enforce their rights, according to disclosures posted on the website of that New York-based bank.
MetLife’s risks of repurchases as of Dec. 31 were tied to approximately $58.6 billion of loans issued since 2008, mainly through government-supported programs, according to the insurer’s annual report.
Calagna, the company spokesman, said appraisals for those mortgages were designed to “meet or exceed” required guidelines and its other practices were sound.
“These loans were originated and underwritten in accordance with investor guidelines and in compliance with all applicable laws and regulations,” he said