Capital One Shuts Down
GreenPoint Mortgage Unit

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 Financial Corp., then a large New York savings and loan specializing in mortgages.

In a statement, Capital One, McLean, Va., said it will take an after-tax charge of $860 million, or $2.15 a share, most of it this year. The company is revising downward its 2007 earnings guidance to approximately $5 a share. Capital One had 2006 per-share earnings of $7.62.

Capital One Chairman and Chief Executive Richard D. Fairbank in a memo yesterday to employees played down the significance of the bank's mortgage arm, saying it represents "a small part of Capital One's diversified businesses." Credit cards remain Capital One's biggest line of business, generating $538 million, or 72%, of its $750 million in second-quarter net income. Capital One's current market value is $27.73 billion.

The unit specialized in so-called nonconforming loans, which don't meet the standards set by Fannie Mae and Freddie Mac, the government-sponsored providers of mortgage funds. GreenPoint specialized in "jumbo" loans above the $417,000 limit and Alt-A loans to home buyers who don't fully document their income or assets.

Capital One officials said the bank will close GreenPoint's 31 locations and eliminate 1,900 jobs immediately. The credit-card giant said the subsidiary wouldn't make any more new mortgages but will fund those in the pipeline with locked-in rates.

Mr. Fairbank said in the memo that despite "a valiant job" of cutting costs and tightening underwriting standards, the unit couldn't "weather the challenges currently facing the mortgage industry."

The company said that despite the pain of shutting down a once highly valuable business, the acquisition of North Fork and the 90 branches from GreenPoint's banking unit helped Capital One evolve from predominantly a credit-card company into a full-fledged bank. Capital One said it bought North Fork for its branch network, customer base and deposits, not for its mortgage business, which was relatively volatile and less valuable as a potential earnings stream. Capital One said it valued the mortgage unit at about $2 billion of the $13.2 billion North Fork purchase price.

Capital One isn't exiting the mortgage business entirely. The company will still continue to originate and sell traditional mortgage loans through its 750 bank branches in the northeastern U.S., Texas and Louisiana. Capital One is also retaining a $12.5 billion mortgage portfolio, which includes loans originated by the banks it acquired and $680 million of second mortgages originated by GreenPoint. Capital One said it could have sold those $680 million in second mortgages at a loss but decided to keep them.

GreenPoint was a pioneer in so-called no-documentation and low-documentation mortgages in the 1990s, making its demise a watershed moment. Lou Barnes, co-owner of a Colorado mortgage bank called Boulder West Inc., said GreenPoint built a niche serving wealthy clients, such as attorneys who had a sudden surge in income but couldn't qualify for a large mortgage based on recent stated earnings.

Mr. Barnes said the shutdown was bad news for distressed credit markets, which already have lost access to other major providers and types of loans. "The healthier housing markets can stand a timeout for a while, but the troubled markets are already in a terrible imbalance of buyers and inventory. To remove big chunks of potential mortgages is a big stress."

Capital One made its name in the direct marketing of no-fee credit cards, but the bank has been on a two-year quest to become a full-service bank. Capital One was optimistic when it acquired GreenPoint that the mortgage unit's national infrastructure would give it immediate scale. But the housing market slowed shortly after the purchase and investors cooled on nonconforming mortgages.

Capital One had a $9.69 million loss on its mortgage unit in the first half of 2007. The company said recently that it was slowing the origination of new mortgages to drain its pipeline but was still having trouble selling packaged mortgages and couldn't easily hold them.

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