The down draft in interest rates forced JPMorgan Chase to take a $4.4 billion (36%) writedown on the value of its mortgage servicing rights in the third quarter, according to information released by the company.
JPM is the largest bank to report 3Q results thus far, and its MSR markdown is a sign that other megabanks might follow suit.
"Mortgage servicing values went down because of prepayments and anticipated prepayments of serviced loans due to the drop in interest rates," a JPM spokesman said. (In valuing MSRs, servicers must estimate the future income on the servicing strip.)
"The bank mitigated a material impact through hedging of interest rates," he added.
Chase, the mortgage division of JPM, ranks third nationwide with $1.2 billion of servicing contracts on its books, according to figures compiled by National Mortgage News and the Quarterly Data Report. Of that amount, roughly $925 billion is considered “servicing for others.”
According to the company’s 3Q earnings release, Chase cut the asset value of its MSRs to $7.8 billion, down from $12.2 billion in the second quarter.
Overall, JPM reported a $153 million pre-tax loss on its residential servicing business in 3Q, compared to a $1.1 billion loss in the prior quarter.
In the second quarter, Chase recorded a $1 billion expense reflecting the increased cost of servicing defaulted loans and estimated costs tied to possible foreclosure-related settlements with state attorneys general and the Justice Department.
Despite the fluctuation in earnings, servicing revenues remain fairly steady at $1.15 billion in the third quarter, compared to $1.04 billion in 2Q.
