Issues Lurk Behind JPM’s Jump in Mortgages

Yes, JPMorgan Chase reported a strong third quarter thanks to its mortgage and investment-banking businesses, and it started putting behind it the multibillion-dollar trading loss from its chief investment office. But enough pesky annoyances floated around JPMorgan that its outlook for the rest of the year can only be described as cloudy.

Regulators and prosecutors from multiple jurisdictions are putting heavy pressure on JPMorgan, new charge-offs and legal costs showed. It also faces the same tight margins and tough loan environment plaguing other banks.

"It's never clear and easy in this tough economic environment" to decode the results of JPMorgan Chase, Bank of America and the other large banks, says Jeffery Harte, a principal at Sandler O'Neill & Partners.

One bit of noise came from JPMorgan's home equity loans. The Office of the Comptroller of the Currency ordered it to take an additional $825 million of charge-offs on home equity loans. The home equity loans were written down to their collateral value, even though in many cases the borrowers are current.

Some have even been current for years, Chief Financial Officer Doug Braunstein said during a Friday conference call to discuss earnings. Of those borrowers, "97% are current and 85% are making principal payments," Braunstein said.

In response to the backlog of lawsuits that have been filed against JPMorgan, the company set aside $684 million of pretax expense for its litigation reserves. The latest: The New York state attorney general charged JPMorgan's Bear Stearns unit with committing fraud when it sold hundreds of billions of dollars of mortgage-backed securities. It was the first lawsuit to come from a joint federal-state task force probing misconduct that led to the financial crisis.

"We try to reserve what we can reserve for," Chairman and Chief Executive Jamie Dimon said during a Friday conference call. He declined to specifically comment on the litigation.

Even JPMorgan's rosy investment banking numbers have a double-edged sword, according to Dimon. While the Federal Reserve's plan to buy an unlimited amount of mortgage securities until jobs rebound helped contribute to higher trading volumes as the market responded, the promise to keep rates low through at least mid-2015 hurt Chase's margins, Dimon said.

"I wouldn't give QE3 a lot of credit," Dimon said. "Clearly it helped the markets a little bit…[but] lower rates hurt the bottom line."

Indeed, JPMorgan's net interest margin fell to 2.43% in the quarter, from 2.66% a year earlier. That puts a squeeze on profits, as do revenue trends. Though JPMorgan's quarterly revenue rose nearly 6%, fee-based businesses like investment banking and mortgages were primary drivers. Loan demand was modest; JPMorgan reported $721.9 billion of loans, up 4% from a year earlier and down nearly 1% from the previous quarter.

Executives sought to be upbeat. JPMorgan can grow lending on "jumbo [mortgages]…and we think they are very good credits going forward and you can see we are growing the commercial bank," Braunstein said. "We are growing auto; [credit] card we hope to grow. We want to push the loan growth a little bit."

Tight margins require constant adjustments in decision-making for lending and other parts of the business, Dimon said. "There have been a lot of changes in the business," Dimon said. "We've got to adjust to those changes."