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Chase Chief Provides Detailed Assessment of Mortgage Business

Jamie Dimon outlines distressed loan strategy, growth plans

April 5, 2012

By staff

The mortgage crisis took its toll on JPMorgan Chase & Co., which was hit with an overwhelming amount of distressed loans and a barrage of litigation from mortgage-backed securities investors. The financial institution faced the monumental task by beefing up its servicing staff, integrating its servicing technology and utilizing a host of programs to deal with delinquent borrowers. However, Chase has no plans to get out of the mortgage business and even hopes to double its portfolio -- with plans to add a thousand more loan originators this year alone.

The New York-based company's difficult journey and upcoming plans were outlined by Chairman and Chief Executive Officer Jamie Dimon in an annual letter to shareholders.

Dimon explained that the firm was ill prepared for the dramatic increase in delinquencies and foreclosures as well as the volume of upset borrowers. He acknowledged the company's robo-signing problems, though he clarified that the affidavits were largely accurate and that the borrowers had defaulted.

Chase has dealt with the servicing issues by boosting its mortgage servicing staff from 6,800 people in 2008 to 23,000 people now. It now has 82 homeownership centers in 28 states. In addition, legacy servicing systems from Chase, Bear Stearns and Washington Mutual Bank were consolidated on Oct. 4, 2011, following a 13-month integration.

photo of Jamie Dimon
JPMorgan photo of Jamie Dimon

The recent servicer settlement will cost Chase $1.1 billion in cash payments, $0.5 billion in refinancing relief to underwater borrowers and $3.7 billion in relief in other benefits for distressed borrowers.

However, even though Chase promises to "make it right" for any borrowers who were abused in the origination process or hit with a foreclosure despite that they weren't delinquent -- no help will be given to unscrupulous speculators who lied about income or occupancy to finance a property.

But borrowers who legitimately cannot afford their payments due to unforeseen hardships will be considered for a loan modification under the government-funded Home Affordable Modification Program and through Chase's proprietary program. Since 2009, 450,000 loan modifications have been completed out of 1.2 million modifications offered. Modified payments have saved borrowers around $1 billion a year, and roughly $10 billion is expected to be saved over the years.

The lender says it generally modifies second mortgages as generously as it does the accompanying first mortgage. On loans where the first mortgage was foreclosed, the company has had more than $16 billion in losses on home-equity loans since 2007 and expects to lose another $5 billion.

Around $1.5 billion in principal has been deferred so far, while debt forgiveness exceeds $2.1 billion and is ultimately expected to reach $4.5 billion. Interest payments are expected to be eventually reduced by a total of $3.5.

Chase claims that it has prevented around 750,000 foreclosures since 2009 at a cost of $6 billion so far. That tab is expected to exceed $12 billion when all is said and done.

The average borrower involved in a foreclosure has not made a payment for at least 17 months. In more than half of foreclosures, the borrower didn't occupy the property at the time the foreclosure was completed. Loan forgiveness expense on foreclosures has exceeded $21 billion since 2007 and is expected to reach more than $27 billion.

The CEO said that Chase will honor its obligations to investors of mortgage-backed securities. But he also said that the company will defend itself against unreasonable repurchase demands.

"Securities claims brought by sophisticated investors who understood and accepted the risks associated with their investments -- which, in some cases, are current and still paying -- face substantial legal hurdles," the letter stated. "Likewise, we are going to fight repurchase claims that pretend the steep decline in home prices and unprecedented market conditions had no impact on loan performance or that seek to impose liabilities on us that we believe reside with third-party originators (or, in the case of WaMu securitizations, with the FDIC).

"These plaintiffs face a long and difficult road, and, as a result, litigation over these issues could take many years."

Dimon acknowledged that significant reserves have been set aside for MBS litigation.

Of the roughly more than 10 million loans from all U.S. lenders that are current but in a negative-equity position, Chase expects around a quarter will eventually become delinquent.

"I suspect that the mortgage crisis will be the worst financial catastrophe of our lifetime," Dimon said. "What the world experienced was almost a collective brain freeze."

He explained that the loosening of traditional underwriting standards, which was actively supported by the government, led to speculative products including Alt-A loans, subprime mortgages and payment-option adjustable-rate mortgages. Some of these programs were even guaranteed by the government.

While the programs helped increase homeownership, "unscrupulous" loan originators began abusing the programs, loan applicants began lying to obtain approvals and market speculation was rampant.

"It was a disaster hidden by rising home prices and false expectations, and once that price bubble burst, we all were in trouble," he stated. "We need to write a letter to the next generation that says, 'Never forget: 80 percent loan to value and verify appropriate income."

Although Dimon touted that Chase was "one of the better actors in this situation," he acknowledged the company's mistakes and the lender's role in the crisis. But many of the mistakes were made by the companies it acquired: Bear Stearns and WaMu.

He pointed directly to mortgage brokers as the biggest bad actors in the mortgage crisis and noted Chase's early retreat from broker originations.

While the mega-bank's $19 billion in earnings last year were 9 percent better than in 2010, the company could have earned as much at $24 billion had it not been for the mortgage costs primarily associated with its 2008 acquisition of Washington Mutual Bank.

"The main reason for the difference between what we are earning and what we should be earning continues to be high costs and losses in mortgage and mortgage-related issues," the letter stated. "While these losses are increasingly less severe, they will still persist at elevated levels for a while longer."

There are an estimated 14,000 new regulatory that will implemented during the next few years, according to the chief, including around 300 more from the Dodd-Frank Wall Street Reform and Consumer Protection Act from which 100 have already been enacted. But Dimon has committed to not letting the huge number of new rules lead to excessive bureaucracy within the company.

Despite all the problems experienced in the firm's mortgage operations, Chase has no plans to exit the business. In fact, Chase speculates that its mortgage base could double from its 5.7 million level now.

Dimon noted that the company originated more than 765,000 mortgages last year.

During normal times, the mortgage unit should generate around $2 billion in annual earnings.

Chase added 700 loan officers during the past year -- bringing the origination staff to 3,800. Another 1,000 originators are expected to be hired this year.

Chase profile

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