JPM’s Originations Up, But So Are Costs, and Margins Are Lower

JPMorgan Chase’s mortgage originations during the second quarter rose 12% year-to-year to $49 billion, and mortgage servicing pretax income also rose, but lower margins and higher expenses caused income in the production unit to drop as the company’s overall net income rose to $6.5 billion from $5 billion.

Overall return on equity in the mortgage banking area was 23% on $19.5 billion of averaged allocated capital. Mortgage banking includes production, servicing and real estate portfolio business lines at the company.

Production pretax income was down by $349 million from the same quarter a year ago at $582 million, and servicing pretax income was up by $68 million at $133 million.

Excluding repurchase losses, production revenue was down by $275 million or 18% from the prior year’s quarter due to the lower margins. Expense in this area was up by $100 million at $720 million due to “higher headcount-related expense as the business built origination capacity.”

JPM indicated repurchase losses are improving.

These “reflected a benefit of $16 million compared with losses of $10 million in the prior year and $81 million in the prior quarter. The current quarter reflected a $185 million reduction in the repurchase liability and lower realized repurchase losses compared with the prior year and prior quarter.”

Mortgage applications during the quarter totaled $65 billion, representing a 3% drop from 2Q 2012 but a 7% increase compared to the first quarter of this year.

On the servicing side of the business, there was a $15 million or 2% decrease in the mortgage servicing rights asset fair value to $770 million from the prior year’s 2Q, and MSR risk management income was $78 million, down from $233 million in 2Q 2012.

However, in contrast to production, servicing expenses and headcount were lower year-over-year.

Servicing expenses in 2Q 2013 totaled $715 million, down $238 million from the prior year’s 2Q, “reflecting lower servicing headcount and lower costs associated with the Independent Foreclosure Review.”

Third-party loans serviced during the second quarter totaled $832 billion, a drop of 3% from the same period a year ago and 2% from the previous quarter.

Real estate portfolio pretax income was $1.2 billion, down $16 million from 2Q 2012, and net revenue in this category was $908 million, down by $132 million or 13% from the same quarter a year ago.

“The decrease was largely driven by a decline in net interest income resulting from lower loan balances due to portfolio runoff,” according to the company.

The provision for credit losses in this category was a benefit of $662 million, up from $554 million in the prior year’s second quarter.

“The current-quarter provision reflected a $950 million reduction in allowance for loan losses due to lower estimated losses reflecting continued home price improvement and favorable delinquency trends, compared with a reduction of $1.25 billion in the prior year,” according to the company.

The net charge-offs in this category were $288 million. There were home equity net charge-offs of $236 million, down from $466 million in 2Q 2012. The comparable figures in the subprime sector were $33 million, down from $112 million. In the prime sector, including adjustable-rate mortgages with a payment option, comparable figures were $16 million down from $114 million.

Noninterest expense in the real estate portfolio segment was $404 million, down 2% or $8 million from 2Q 2012.