Chase Bank hit with downgrade over jumbo mortgage underwriting, fintech gaps

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Moody's Investors Service downgraded JPMorgan Chase's prime jumbo mortgage originator assessment to its second-highest rating, citing the bank's growing reliance on correspondents with delegated underwriting authority and shortcomings in its technology infrastructure.

Moody's uses a five-tiered scale in its assessments. The downgrade to an "above average" rating, from the highest "strong" rating, followed decreases in three out of six components of the assessment. The property valuation and technology components were both downgraded to "above average," from "strong," while the underwriting policies and procedures component of the assessment was downgraded to "average," from "above average."

JB REED/Bloomberg

"We respectfully disagree with the rating and feel it's based on insufficient information. While we provide select correspondent lenders with delegated underwriting authority, we also then conduct individual underwriting reviews on roughly half of those loans. These are high-quality loans that perform well," Amy Bonitatibus, chief marketing and communications officer of Chase Home Mortgage, said in an email.

Concern about the share of loans originated through correspondents with delegated underwriting authority contributed to the downgrade. Correspondents represent 63% of the bank's jumbo production, according to an Aug. 24 Moody's report. The rest of JPMorgan Chase's production gets originated through either its retail or consumer direct channels. Securitized loan pools with higher shares of in-house originations perform better, Moody's recently noted in rating a JPMorgan Chase securitization that had a higher percentage of third-party originations.

Moody's also slammed Chase's Mortgage Express loan origination system for its lack of a "visually intuitive" user interface.

"Chase's new LOS system is unique in that it uses a character user interface, compared to the graphical user interface technology typically used by other originators that we have assessed," Moody's said in the report.

Chase inked a deal in 2013 to license proprietary LOS technology developed by Quicken Loans, a nonbank lender widely regarded for its tech-forward approach to lending, including its digital mortgage platform, Rocket Mortgage. Last year, Chase announced plans to use the online consumer self-service mortgage platform developed by the fintech vendor Roostify.

"The LOS comments were solely based on back-end aesthetics and not the capabilities and innovative solutions it brings to our customers. We are in the final stages of rolling out a digital mortgage experience nationally. The feedback from customers has been overwhelmingly positive," Bonitatibus said.

Moody's maintained its "strong" assessment of the company's financial stability, and that of its parent company as a "diversified bank with solid capital levels." It also maintains a "strong" assessment for JPMorgan Chase's early loan performance for its prime jumbo program.

In addition, Moody's maintained its "strong" assessment for the company's credit risk management, citing "its sophisticated risk management process and solid feedback mechanisms."

Large lenders typically originate more loans through the correspondent channel when interest rates rise and volumes drop, as they have recently. The decline in originations also has increased competition for loans, particularly in the jumbo market. A more competitive market generally puts more pressure on credit and underwriting, although marketwide performance indicators generally have remained strong to date.