STRESS TESTS: MetLife's Insur Strength Carries Along Its Bank

MetLife Inc. (MET), according to preliminary reports, passed the government's stress test with flying colors despite an expansion in mortgage lending last year.

Its mortgage lending unit, MetLife Bank N.A., has $15 billion in assets, or 3% MetLife's $491 billion in total assets. But as a mortgage lender, MetLife Bank made the same mistakes as other lenders in recent years, putting too many eggs in the residential mortgage basket, said a banking expert who examined MetLife Bank's earnings statements for the last two years.

"The holding company looks terrific," said Mike Moebs, president of Moebs $ervices, a Lake Bluff, Ill. bank consulting firm. "As a family, it is a decent business model," but as a standalone bank, he called it too heavily "overconcentrated" in the mortgage business and lacking in significant fee income.

Preliminary results of the U.S. government's bank stress tests were leaked Wednesday ahead of today's scheduled 5 p.m. joint announcement by the U.S. Treasury department and the Federal Reserve.

In the first quarter, MetLife Bank increased its borrowings from the Federal Home Loan Bank of New York and the New York Fed to a total of $6.3 billion, up from $2.75 billion at the end of 2008. Moebs suggested that MetLife was bolstering capital to support potential losses on assets in mortgage-backed investments and in its residential and commercial real estate loan portfolios.

A MetLife spokesman said the company couldn't comment on its banking results. MetLife has said it will issue a press release on its stress test performance after the Treasury releases bank results Thursday afternoon.

MetLife's reported performance in the top handful of banks that don't need to raise capital against a weak economy helped lift shares of MetLife along with other life insurers on Wednesday, as the market gains new respect for life insurer capital management. Shares of MetLife recently traded down 2%

MetLife acquired a banking charter in 2001, but its bank unit had fewer than 100 employees until June 2008, when it acquired servicing rights for $20 billion in mortgages and the mortgage origination and servicing business outside Tennessee of First Tennessee Bank National Assoc., a subsidiary of First Horizon National Corp. (FHN). MetLife also entered into a deal to sub-service another $65 billion in loans from First Tennessee. The bank also bought a reverse mortgage originator.

MetLife Bank president Donna DeMaio said then that the plan was to originate mortgages under the MetLife brand, which didn't carry the negative baggage of more traditional lenders. But instead the housing market downturn continued to deepen.

MetLife Bank more than doubled its assets and increased from 85 employees in 2007 to more than 3,000 at the end of 2008.

Its mortgage exposure also grew.

At the end of 2008, MetLife Bank's $10 billion in assets were mostly related to mortgage lending. It held $4.4 billion in securities, mostly backed by mortgage loans. Its $5 billion mortgage portfolio consisted of $3.8 billion in real estate loans and $1.2 billion in commercial loans, which Moebs said exposed the bank to the real estate downturn.

Before buying the mortgage business, MetLife Bank listed its specialization as commercial lending, but switched its asset concentration hierarchy to mortgage lending in 2008.

MetLife Bank's 2008 Tier 1 risk-based capital ratio was 11.72%, well above minimums, but Moebs said the bank's equity capital-to-asset ratio was a less impressive 3.5%, the lowest of the 19 banks tested.

-By Lavonne Kuykendall, Dow Jones Newswires; 312-750-4141; [e-mail]