The unprecedented decline of the U.S. housing market has dealt a lethal blow to many in the home mortgage industry, but the market's woes could work to the long-term advantage of one very large U.S. bank--New York-based JPMorgan Chase & Co. In more recent weeks, a sharp upturn in refinancing volume has further worked to the advantage of the larger mortgage lenders that still can field plenty of origination staff. * Chase Home Lending, JPMorgan's main residential lending unit, was already one of the industry's largest home mortgage originators when the market collapsed in the summer of 2007. Since then, its competition has been scaled back dramatically as hundreds of mortgage companies and brokerage firms have left the business, along with a few large depository institutions like Charlotte, North Carolina-based Wachovia Corporation and Pasadena, California-based Indymac Federal Bank FSB. * JPMorgan--the country's second-largest bank as of Dec. 31, 2008, according to an asset ranking published by SNL Financial, Charlottesville, Virginia--helped drive the industry's rapid consolidation when it acquired Washington Mutual Inc. (WaMu), Seattle, in September 2008 from the Federal Deposit Insurance Corporation (FDIC). The acquisition was negotiated after WaMu was seized by federal banking regulators. JP Morgan paid $1.9 billion for all of the deposits, assets and certain liabilities of what had once been the nation's largest thrift, according to the FDIC.
WaMu had been a substantial mortgage originator in its own right, and one might fairly question the wisdom of buying such a company in the midst of the worst housing recession in 60 years. The thrift originated $142.15 billion in 2007, making it the fifth largest residential originator that year, according to National Mortgage News/Quarterly Data Report.
JP Morgan took an immediate $29.4 billion writedown on WaMu's $174 billion portfolio of mortgage and home-equity loans that it was carrying on its balance sheet at the time of the acquisition. This writedown represented the company's best estimate of the portfolio's remaining credit losses.
But the U.S. housing market has deteriorated sharply since the bank made that assessment in September 2008, and senior executives there have not ruled out the possibility that further writedowns may be necessary on that WaMu portfolio.
By looking at the total amount of mortgage lending that WaMu and Chase Home Lending did last year, one gets a sense of the scope of the combined operation. As a standalone company prior to the acquisition in the fall, WaMu tallied up $40.5 billion in residential originations in 2008. That was enough to earn it a spot as eighth largest originator in 2008, according to National Mortgage News/Quarterly Data Report. Chase was the second largest home-loan lender for all of last year, with a little more than $187 billion in residential originations, the same source reported.
Chase's own $200 billion loan portfolio of unsecuritized mortgage and home-equity loans has also been hemorrhaging copious amounts of red ink for the last several quarters. (Chase's mortgage servicing portfolio has performed much better of late. According to its quarterly earnings releases, that business has produced net revenue of $412 million, $1.9 billion and $1.5 billion in the third and fourth quarters of 2008 and the first quarter of 2009, respectively.)
There have been recent signs that the severest recession since the 1930s is beginning to moderate, yet home prices are expected to drop through the remainder of the year and unemployment is forecasted to rise well into 2010--signaling that additional losses may be in store for this loan portfolio as well.
This all means that the bank won't know the true cost of its WaMu acquisition until housing prices finally rebound in 2010 or 2011, bringing an end to the loan losses. "The deal brought them a significant amount of [credit] risk," says Gary Townsend, president and chief executive officer at hedge fund Hill-Townsend Capital LLC, Chevy Chase, Maryland. "It remains to be seen whether all this works out happily."
Still, with a strong balance sheet and an array of large and profitable businesses, JPMorgan should be able to ride out the recession with little significant difficulty. And whatever the short-term cost turns out to be, there's little question the acquisition has become a crucial part of JPMorgan's origination strategy for home mortgages for the foreseeable future.
Washington Mutual had a large branch network throughout much of the western United States and enjoyed a significant presence in California, Washington and Florida--three big states where JPMorgan had no branch banking presence of its own. JPMorgan, which conducts all of its consumer banking business under the Chase brand name, now has a powerful coast-to-coast branch network that by its own estimate ranks third in size behind those of Charlotte, North Carolina-based Bank of America Corporation and San Francisco-based Wells Fargo & Co.
Although it has announced it is in the process of exiting the wholesale channel, Chase Home Lending is still well positioned to be a dominant player in the residential mortgage market thanks to its expanded branch network--which now gives it a commanding national presence. What it is giving up in wholesale volume, it may well be able to make up for in ramped-up retail volume.
In the fourth quarter of last year, Chase was the fourth-largest player in residential wholesale volume, according to National Mortgage News. While in the fourth...