In an interesting, yet troubling development for the second-largest mortgage lender in the U.S., JPMorgan Chase & Co. (NYSE: JPM) announced that it will avoid making mortgage loans to consumers with less-than-pristine credit, due to a lack of confidence in its ability to recoup money from foreclosures, even with assistance from the government.
This is a major paradigm shift for JPMorgan and its mortgage business. Previously, it had relied on collateral and federal lending initiatives as failsafes for majority of its loans, but now, the financial institution is focusing more on the creditworthiness of its borrowers. In other words, the change in strategy means JPMorgan is trying to minimize the odds of foreclosures, due to its negative impact on a business standpoint. JPMorgan Chase residential mortgage banking business CEO Kevin P. Watters told Reuters that the costs of handling the foreclosure process are now “astronomical” as compared to the past.
Indeed, foreclosures have become more expensive for banks to deal with when trying to recover losses incurred from mortgages, due mainly to federal and state laws and reforms. Analytics from market research firm RealtyTrac show that it took about four months, or 120 days on average to foreclose on a property as of the start of 2007, or a few months before the housing market crash and broader, global economic recession. But in the January to March 2014 quarter, it took an average of more than a year and a half – 572 days to be exact – to foreclose on a home.
Although other institutions have done their part to focus more on a consumer’s credit quality in the aftermath of the recession, JPMorgan is upping the ante and making a more concerted effort to avoid relying on government initiatives as a backstop for mortgage losses. And if other banks follow JPMorgan’s example, this could be a bane for consumers, as it would become harder for them to secure financing when purchasing a home. “This could reduce the number of first-time buyers and slow the speed with which people who lost their homes during the crisis can become homeowners again,” warned Columbia University real estate finance professor Christopher Mayer.
JPMorgan is expected to take up until next year before its new mortgage strategy is fully implemented, but the bank is, as early as now, pulling back from Federal Housing Administration-guaranteed loans. These products allow first-time homeowners to borrow up to a maximum 96.5 percent of their home’s value. As a result, these loans are guaranteed against a possible default, but the FHA has been at loggerheads with major banks, including JPMorgan, over whether some of the loans do qualify for the insurance or not.
In a conference call on Tuesday, JPMorgan Chief Executive James (Jamie) Dimon expressed his frustration over how the institution settled with the FHA to the tune of $614 million in February; this was due to the above situation, wherein some loans were supposedly ineligible for insurance. Further, Dimon said that JPMorgan has had an experience with FHA loans that has been so toxic that the biggest question would still be whether the bank should “be in the FHA business at all.”