There are lots of reasons for JP Morgan Chase & Co. not be in the mortgage business. But the company’s chief sees even more reasons to prudently remain in the sector.
Mortgage lending can be volatile for big banks. In addition, as regulatory costs and capital requirements have risen, the business provides increasingly lower returns.
Furthermore, new rules in residential loan origination and mortgage servicing have become enormously complex — potentially leading to problems and errors for big banks.
That is according to a letter to shareholders from JPMorgan Chase & Co. Chairman and Chief Executive Officer Jamie Dimon.
“It is now virtually impossible not to make some mistakes — and as you know, the price for making an error is very high,” Dimon wrote. “So why do we want to stay in this business?”
Well one reason is that home loans are important to the New York-based company’s customers — most for whom a home will be the largest purchase they ever make.
Another factor is the emotion associated with a home purchase. Whether it’s starting a new life, raising a family or moving into retirement — banks want to build lifelong relationships with their customers by being there at such critical junctures.
“Mortgages are important to our customers, and we still believe that we have the brand and scale to build a higher quality and less volatile mortgage business,” Dimon stated.
As part of this process, Chase has reduced its mortgage product offerings to 15 from 37, prepared to roll out a new origination system and leveraged digital origination channels.
Dimon noted that the company has dramatically reduced its origination of mortgages insured by the Federal Housing Administration — which have become too costly and risky to originate.
“Part of the risk comes from the penalties that the government charges if you make a mistake — and part of the risk is because these types of mortgages default frequently,” the letter stated.
While the reduction of FHA originations will make it more difficult for Chase to meet its obligations under the Community Reinvestment Act and Fair Lending, Dimon says the financial institution has solutions in place to responsibly meet these obligations — including the more subjective requirements and the quantitative components. And the solutions don’t unduly jeopardize Chase.
On the servicing side, Chase prefers to avoid servicing defaulted mortgages altogether.
“We do not want to be in the business of foreclosure because it is exceedingly painful for our customers, and it is difficult, costly and painful to us and our reputation,” Dimon wrote.
He noted that making fewer FHA loans has helped reduce the foreclosure inventory by 80 percent.
In addition, Chase is
negotiating with Fannie Mae and Freddie Mac to have them service any delinquent mortgages that are backed by them.
Anne Canfield of the Consumer Mortgage Coalition trade group and Canfield & Associates Inc. recommends reading Dimon’s full letter.
“Mr. Dimon’s letter is really worth reading — it is a primer on banking and the many challenges the industry faces,” she said in a written statement.
