Home Equity Deteriorates at JPMorgan Chase

JPMorgan Chase reported net earnings-per-share growth of 21% on a year-over-year basis, but weakening housing markets sparked the company to re-evaluate its home-equity lending practices.

The company said it added to the reserve for its home-equity portfolio during the second quarter, anticipating continued weakness in the housing finance sector. The company also tightened underwriting, particularly as it pertains to third-party originations.

But at the same time, JPM saw improved mortgage banking performance during a period in which many mortgage lenders reported weaker results. Both loan production and loan servicing generated higher revenue than they did a year earlier.

That contributed to a 39% increase in non-interest revenue from JPM's retail financial services unit.

A change in accounting also meant that some loan origination costs, previously netted against revenue, were reclassified during the quarter, benefiting the non-interest revenue component of JPM's results.

But the banking and financial services giant also dramatically increased its provision for credit losses, adding $587 million to the retail financial services reserve in the second quarter. During the second quarter of last year, the provision was just $100 million.

The second-quarter reserve includes $329 million of allowance for home-equity loan losses.

JPM said that the increase in the loss provision "reflects weak housing prices in select geographic areas and the resulting increase in estimated losses for high loan-to-value home-equity loans." The bank said high LTV loans originated through wholesale channels were especially worrisome.

JPM said it implemented additional underwriting changes and pricing adjustments during the second quarter to reflect higher risk in high LTV second mortgages. The company's underwriting changes included lowering maximum LTV ratios, reducing exposure to stated-income loans and raising minimum credit scores, the company's chief financial officer, Mike Cavanagh, said in a conference call for investors and analysts.

Mr. Cavanagh said that the changes in underwriting, if they had been in place last year, would have reduced home-equity acquisitions from brokers by one-third and reduced losses by 70%.

Home-equity charge-offs totaled $98 million in the second quarter for a 0.44% net charge-off rate. The home-equity charge-off total was more than three times the amount charged-off a year earlier, and Mr. Cavanagh said the company expects the loss rate to continue trending upward.

JPM said its average home-equity loan balance was $89.2 billion in the second quarter, up from $76.2 billion in the second quarter of last year.

Separately, JPM said that mortgage banking net income was $71 million in the quarter, compared with a loss of $7 million in the year-earlier period.

Loan production accounted for $463 million of the mortgage banking unit's $633 million of revenue during the quarter. JPM said its home loan origination volume totaled $44.1 billion during the quarter, up 41% from the year-earlier period.

Net mortgage servicing revenue, which includes the results of interest-rate hedging, was $170 million in the second quarter, up from $116 million in the prior-year period, despite slightly less revenue related to hedging the MSR portfolio. JPM serviced $572.4 billion of third-party home loans at the end of the quarter, up 15% from a year earlier.

JPM's chairman and CEO, Jamie Dimon, said the diversity of the company's business mix should provide a cushion against a credit downturn.

"Although we remain at a relatively benign point of the credit cycle, we continue to focus on being prepared for a less favorable environment," he said. Mr. Dimon said during the conference call that the company is confident that the subprime mortgages on its books are "pretty clean and pretty well hedged." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.bondbuyer.com/ http://www.sourcemedia.com/

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