Interest Rate Roundup

Thursday, December 20, 2007

The "key" to losing a lot of money? Making too many real estate loans

That seems to be the lesson from this after the bell news out of KeyCorp. The super-regional bank (the nation's 24th largest by assets as of Q2, per American Banker) announced wide-ranging losses related to its real estate lending exposure, as well as several changes to its business plans ...

* Key has a $3.7 billion portfolio of residential property commercial real estate development loans (meaning loans to developers to build homes and condos, as opposed to individual mortgages to home buyers). It said it will no longer make such loans to many home builders outside of its regional banking "footprint." It will also transfer roughly $1.1 billion of its loans to builders -- and $800 million of its condominium construction loans -- to a special asset management group. Recall that Wells Fargo recently did something similar with a portfolio of consumer home equity loans.

* Key also noted that residential real estate development loan conditions are deteriorating in places like Florida and California. That will result in net loan charge-offs of $110 million to $120 million. in Q4 Nonperforming assets are going to surge by 34% in the quarter ($195 million) from Q3 levels.

* Credit market turmoil is also hurting the valuation of commercial mortgage loans in its held for sale portfolio, and impacting the valuation of certain real estate investments. Total additional losses: $55 million to $65 million.

* The company said it would get out of the national home improvement lending business. It makes dealer-originated loans to fund improvement projects, with a portfolio of $1.4 billion.

* All told, Key plans to cut 740 jobs as a result of these actions, and leave 300 other open positions unfilled. The company's bottom-line Q4 forecast? A per-share loss of 5 cents, versus expectations for a profit of 66 cents.


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