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National City Takes Another Hit

The company says its mortgage business may lose $160 million this quarter.

Mortgage pain is increasing at

National City

(NCC)

.

The Cleveland-based bank said Monday that it expects to post a third-quarter loss in its mortgage operations that "is more likely to be around the high end" of its previously stated range of $130 million to $160 million.

Two weeks ago, National City said at its annual investor day that it would slash 1,300 mortgage jobs and take a pretax charge of $200 million to write down the value of mortgage securities.

In August, Nat City suspended wholesale originations of home equity loans and combined the unit into its overall mortgage operations, which resulted in 500 job cuts.

Mortgage lenders such as

Countrywide Financial

(CFC)

have been eliminating thousands of jobs as the U.S. housing market has turned sour.

"We have been systematically reducing the role of mortgage ... in our company in a number of different ways," National City CEO Peter Raskind said at the company's investor day. "Our full expectations looking ahead is that mortgage will occupy a smaller place in our company than it has

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in the past. That said, we fully intend to remain in the mortgage business."

National City reiterated Monday in the filing that fee income and expenses will include a "number of unusual and/or nonrecurring items" related to mortgage banking.

"Loan-sale revenue will include the effects of mark-to-market losses on Alt-A and closed end second mortgages held for sale, as well as losses from 'scratch and dent' sales and higher-recourse reserves," the company said in the filing.

On the bright side, Nat City said credit quality in its commercial portfolio is "stable," while the bank's core consumer portfolio -- including home equity lending made directly to borrowers -- is performing well," according to the filing.

But the company said real estate lending "risk levels continue to be modestly elevated" in its portfolio for subprime first and second lien loans made through its former subprime lender, First Franklin. The company sold First Franklin to

Merrill Lynch

(MER)

late last year.

Nat City is also increasing reserve levels to protect for higher losses in its national home equity portfolio.

Christopher Mutascio, an analyst at Stifel Nicolaus, worries that Nat City's overall credit quality is worse than the company is projecting.

"Management continues to indicate that credit quality in the commercial loan portfolios is stable," Mutascio writes in a note. "However, an analysis of the company's nonperforming assets through the month of August seems to paint a different picture.

Total nonperforming assets have increased $172 million (20%) in the two months from the end of June. Of this increase, $91 million (or 53% of the increase) has been driven by the commercial construction portfolio, the commercial real estate portfolio and the commercial & industrial portfolio," Mutascio writes. "In fact, even on a year-over-year basis the growth in commercial-related nonperforming assets has slightly outpaced that of residential real estate-related problem loans. Thus, we are not convinced that company is only facing credit deterioration pressures from its subprime mortgage and national home equity portfolios. We believe it is more broad-based than that."