B of A Quits Subprime Lending, Car Leases

Bank of America Corp. on Wednesday became the latest lender to report big problems with loans to less-credit-worthy borrowers amid the weak economy.

BofA, the nation’s third-largest bank, said it will stop making real estate loans to so-called subprime borrowers, generally individuals with shaky credit histories or no credit histories.

The bank also will quit the car-lease finance business, which has suffered amid slumping prices for used cars.

“Both of these businesses . . . have become unattractive from a risk-reward standpoint and have not produced required rates of return,” said Kenneth Lewis, BofA’s chief executive.

The Charlotte, N.C.-based bank said it will liquidate its $26.3-billion subprime real estate portfolio over the next nine months and has lined up buyers for the subprime unit’s branch network.

BofA will take a $1.25-billion charge against earnings in the current quarter reflecting its exit from the subprime business and the car-lease business.

“You’ve got many more banks getting out of subprime lending than coming in right now,” said Marni O’Doherty, an analyst with Keefe, Bruyette & Woods in New York. “Banks are finding it much more labor-intensive, since you’ve got to be on top of these types of loans as soon as they get delinquent.”

The BofA announcement follows the failure of Chicago’s Superior Bank two weeks ago. That thrift was a big lender to subprime borrowers, a sector many lenders courted in the late 1990s amid the economic boom.

In fact, some of the nation’s biggest banks are among the largest subprime lenders, mostly because of acquisitions made by the banks in the last few years. For example, the nation’s largest bank, New York-based Citigroup Inc., recently purchased Associates First Capital, a Dallas-based subprime lender, making Citigroup one of the most active subprime lenders.

In the past, most subprime lenders were consumer finance companies.

In May, the percentage of subprime mortgages nationwide that were seriously delinquent--meaning three or more months late on payments--rose to 6.37% from 5.55% at the end of last year, according to San Francisco-based Mortgage Information Corp. That rate has risen from 3.83% in September 1997.

Bank of America’s subprime real estate lending business, EquiCredit, which offers both mortgages and home equity loans, said at the end of June that $1.4 billion, or 5.57%, of its loans were nonperforming, meaning delinquent.

“This subprime market has changed since the economy has slowed,” said John Ballentine, director of the American Bankers Assn.’s community development program. “If there are losses, they will be in this market, and lenders simply can’t afford to lose money right now.”

Car-lease financing also has proved to be much less lucrative than bankers expected, and several big names have exited the business. Bank One Corp. and Chase Manhattan Corp. have posted losses recently in that area. Among other big banks, KeyCorp and National City Corp. both left the business last year.

Banks have been big suppliers of car leases in recent years, betting on a strong market for used cars. But the weak economy has spurred a plunge in prices in the used-car market. Some banks say they are losing $1,000 or more on leased cars in resales.

BofA said it has made lease loans on about 495,000 vehicles. The bank said that although it won’t make new leases, customers with outstanding leases won’t be affected.

Despite the hefty charge BofA will take to quit the businesses, its stock fell only modestly Wednesday, losing 6 cents to $62.50 on the New York Stock Exchange. The shares have surged 36% year to date.

BofA said exiting the businesses will “pave the way to significantly reduce volatility” in its earnings.

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Subprime Mortgage Leaders

Here are the lenders that originated the largest dollar volume of subprime mortgages in the first quarter, according to estimates by Inside Mortgage Finance of Bethesda, Md.

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Loans originated Change from Lender in Q1 (billions) Q1 2000 CitiFinancial Credit $4.70 +241% Household Financial 3.72 +14 Washington Mutual 2.16 +68 Bank of America 2.03 -12 Option One Mortgage 1.50 +12 GMAC-RFC 1.35 +2 Countrywide Credit 1.30 +8 Ameriquest Mortgage 1.20 +17 New Century Financial 1.03 +8 First Franklin Financial 1.01 -5

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Source: Inside Mortgage Finance