So Why Did Capital One "Suddenly" Exit Mortgage Lending??

Last week, Capital One Financial (COF) announced that is was formally withdrawing from the residential mortgage loan market.  Some observers mistook this announcement for news, thinking that COF had actually been engaged in residential lending in a serious way.  Housing Wire, for example, reported that COF had “suddenly” exited the mortgage and home equity business.

In fact, despite several acquisitions, these motivated mostly by a desire to accumulate deposits, COF had never really cared about mortgage lending or anything other than credit cards and consumer loans.  “The challenging rate environment and marketplace ... do not allow us to be both competitive and profitable for the foreseeable future,” Sanjiv Yajnik, the president of financial services at COF, said in an internal memo.

At the end of Q2 ’17, COF had about 21% of its loan book in all real estate loans, including residential at 8% and about 12% commercial real estate loans.  Almost 60% of the balance sheet is “loans to individuals,” including credit cards, auto loans and other consumer revolvers.  Most large banks that inhabit Peer Group 1 have a third of their balance sheet in real estate exposures of one sort or another.  COF owns a big slug of mortgage backed securities, however, something to ponder as the Treasury yield curve slowly inverts under the weight of the Yellen Put.

The reason that COF looks askance at asset classes such as resi comes down to simple returns.  COF’s margin on net interest income is almost 7% on a tax equivalent basic compared with an average of 3% for Peer Group 1.  That’s more than 2x JPM, BAC, WFC, etc.  That fat spread comes from consumer loans.  Indeed, the yield on earning assets for COF was over 400bp higher than its asset peers at the end of Q3 ’17.  

Even with all that yield, however, COF still delivers high single digit equity returns overall.  Or put more bluntly, things like residential mortgages were dragging down the overall equity returns for the bank. Indeed, real estate loans including residential and CRE, are currently the lowest yielding loan category on COF’s book at 418bp.  

Credit cards comes in at a handsome 1,400bp and consumer loans is 725bp, according to the FDIC.  With fees and other goodies added in, total net revenue margin for the cards business rises to almost 17%.  Commercial & Industrial loans at 560bp are actually quite respectable for the large banks, with the weaker players such as Citigroup (C) laboring at less than half of that spread for C&I loans.

Real estate loans at COF have been falling as a percentage of total loans for the past five years.  During this same period, COF’s total assets have grown and its deposit base has essentially doubled.  The bank securitizes about $1 billion per quarter, including about $400 million in residential mortgage loan production that will gradually go away.  But this is actually a positive for COF, since the risk-adjusted return on residential lending is probably negative anyway.  Note that the bank is actually pursuing retail investment advisory business alongside the consumer credit products. 

Thanks to the blessing of the Dodd-Frank law and the constant intercessions of the folks at the Consumer Finance Protection Bureau, who have turned extortion into a form of public policy, residential mortgage lending is now a loss leader for most of the US banking industry.   COF is merely the latest commercial bank to make the obvious decision, namely that residential lending is not a business worth doing – at least without significant scale.  And in any event, the double digit return available from credit cards is pretty hard to argue with any day of the week.

Last thought.  COF is the largest monoline consumer credit card issuer, but Citi is the largest credit card shop in the industry.  Given that the latter has already bailed out of asset management and residential mortgages, may be time to slam these two consumer credit shops together and call it a day.  There may not be much organic growth in the banking industry and even less alpha, but there is always M&A.


SubjectivObject Wed, 11/15/2017 - 08:56 Permalink

"Thanks to the blessing of the Dodd-Frank law and the constant intercessions of the folks at the Consumer Finance Protection Bureau, who have turned extortion into a form of public policy, residential mortgage lending is now a loss leader for most of the US banking industry." Like I have a clue how that fits in here, or something.

swmnguy SubjectivObject Wed, 11/15/2017 - 11:59 Permalink

That passage is so much bullshit it's hard to even understand.  Any of us who lived through, oh say, 2000 - 2010, have a very different understanding of the home mortgage industry.All the talk about CRA is self-serving mendacity as well.  The CRA was enacted in 1979, thereabouts.  Wasn't a problem at all until the crazy-ass bubble boom in the 2000's.  After it became obvious that the Finance Sector had engineered one of the greatest looting operations in human history, using residential mortgages as a key to loot the bond market, Thomas DiLorenzo wrote an article exonerating the banksters, bringing up the CRA to blame poor people, and insinuating that it was mostly poor black people (it wasn't; poor whites benefitted a lot from the CRA).  It was one of the most flagrantly dishonest and evil set of excuses I've ever read. In my city, the neighborhoods that were devastated by foreclosures in 2007-2009 were mostly the poor neighborhoods, white and black.  Some help CRA was to those people, who lost the homes they could barely afford, and got stuck with the principal debt and being debt-mined and asset-stripped as most of their early payments were pure interest and the banks just turned around and re-sold their houses to new debt mules.It does take a little bit of work to service the residential mortgage market.  Work requires employees.  Employees have to get paid.  Labor is only a cost to be cut in our financialized economy.  So Capital One just doesn't want to go to the bother and expense, when they can just sit back and let computers handle credit card accounts, making money off of money they get for virtually free from the Federal Reserve.  Blaming Dodd-Frank, the CFPB and CRA for the fact that Capital One is a bunch of lazy greedy fucks is an extension of the mentality that drove the fiasco that exploded in 2007-2008.Death to the moneychangers, indeed.  A little work won't kill 'em, and if it does, so much the better. 

In reply to by SubjectivObject

11b40 Wed, 11/15/2017 - 08:59 Permalink

Must be nice to get all the essentially free 1% money for those standing beside the spigot.  Lending it out at rates between 6% & 30% is easy money for moving around 1's & 0"s.  I remember when interest rates on credit cards were capped at 18%.  See what buying poiticians can do for you?

junction I am more equa… Wed, 11/15/2017 - 12:23 Permalink

Capital One cut its mortgage staff before, around August 21, 2007, when it shut down its Greenpoint mortgage unit in Melville, L.I. with no prior notice. Then, about 1,800 jobs got wiped out.  Greenpoint Savings Bank had a policy of requiring a 25% down payment on "no doc" mortgages, a policy which insulated the bank from market downturns. When Capital One bought North Fork Bank (the bank that took over Greenpoint), it allowed North Fork's CEO to get his multi-million dollar takeover score tax free, letting him gross up this payment.  Wall Street Journal - Capital One Financial Corp., citing "an unprecedented set of market circumstances," plans to shut down its struggling GreenPoint mortgage unit -- keeping only pieces of a business valued at $6.3 billion just three years ago.The ninth-largest U.S. bank by market value, Capital One bought GreenPoint in last year's $13.2 billion purchase of North Fork Bancorp, of Melville, N.Y. In 2004, North Fork paid $6.3 billion for Greenpoint Savings Bank.

In reply to by I am more equa…

I Write Code Wed, 11/15/2017 - 10:48 Permalink

Well thank you, this may be the first time this year I've noted a nice, clear financial article on ZH.And so far no clearly antisemitic comments, so let me add:  Joooooooooooooooos

swmnguy Wed, 11/15/2017 - 11:48 Permalink

Capital One are idiots in the credit card business, too.I never got a credit card until I was in my 30s, about 20 years ago, due to having been in tight financial circumstances in early life.  They used to have standards for approving credit, which didn't help, but mostly I didn't want to borrow money I might not be able to repay.So the first card I got was a Capital One card.  It had a $1,000 credit limit, and an interest rate of 8.99%.  I used it for walking-around money, in place of cash, and paid it off every month.  After a couple of years, I asked for a credit limit increase, and was denied due to short duration of credit.  OK, fine.Now it's 20 years later.  I make about $150,000 a year.  I have a drawer full of credit cards, totalling close to $100,000 in available credit (both personal and for my sole-proprietor business).  I've never been late on any payments, and I've paid them all off every month, with a very few exceptions where I carried a balance (paying well more than the minimum) for at most 3 months.  I've paid off 4 or 5 car loans, a mortgage, I'm paying enough extra on my current mortgage that I'm turning a 30-year into about a 12-year. My credit score is available to me on all my various card accounts, and I pull a score every so often through my credit union.  FICO scores are a bunch of bullshit for the most part; they have numerous algorithms depending on what kind of credit you're seeking; but in the wide view they do show general creditworthiness.  My scores are in the 840s for the most part; Capital One shows me in the lower 820s.I use my credit cards on a rotating basis, to keep them all active.  My Capital One card is still at a $1,000 credit limit, and the interest rate is now 24.99%.  It's an awful card.  I use it from time to time, and when I put more than $100 on it, my credit scores go down due to the proportion of credit used.  I stop using it and my score goes back up.Every so often I ask them for a limit increase.  They always decline, saying I don't have enough recent payments for them to determine my creditworthiness.It's hilarious.  They have access to my full credit report, or they wouldn't have my FICO score.  Obviously they use a completely autonomous algorithm to decide creditworthiness.  No human being would look at my credit report and decide not to trust me with more than $1,000.  Chase hasn't.  American Express hasn't.  Bank of America hasn't.  My credit union hasn't.  Only Capital One.It's a game to me now.  I'm going to use that card once a month at a parking meter, $1.00 a month for a year, and then ask them again for a credit increase.  It's not like I care.  I just want to see how long these clowns are going to blindly follow their computers.  I don't need more credit.  I don't need the credit I have available to me now.  I'm a cash guy.  I'm not going to finance a god-damn cup of coffee; I don't have to and I don't find it convenient or pleasing.I can't imagine having a home mortgage with those idiots.  Of course, I can't imagine having a home mortgage with any institution that isn't headquartered in my community, who knows the local real estate market.  I do all my financial stuff with my credit union and I never pay fees.  If I have a question, I walk in the door, and I've never had to wait more than 10 minutes to talk to at least a Vice President.  I can't understand why anyone would put up with any lower level of service.But these Capital One guys are absolutely worthless.

theprofromdover swmnguy Wed, 11/15/2017 - 12:14 Permalink

Sorry, you don't understand what a terrible customer you are to them.They can't make any money off you because you pay your debt in full every month.You are the last guy they would want to raise a credit limit on.-that doesn't mean you are a bad citizen, it just means they don't like your sensible attitude.(It also doesn't make them anything other than thieves of course, they live to feed of folks who'll carry debts at 25%, forever)

In reply to by swmnguy

scraping_by Wed, 11/15/2017 - 13:17 Permalink

Strange how residential mortgage lending is a negative return business, yet the price of houses keeps going up, nationally. Aside from the obvious places like Silicon Valley and Seattle, the numbers keep increasing even out here in flyover country. Econ 101 supply and demand points the other direction.