JPMorgan Chase & Co has stopped issuing mortgage to borrowers with poor credit rating. The second largest mortgage lender in the nation is pulling back from offering home loans to risky borrowers due to foreclosure anxieties. Even with government's assurance, JPMorgan Chase & Co has lost confidence in its capability in recovering money from foreclosure homes and this has triggered a shift in the way they conduct business.
JPMorgan Chase & Co used to check 2 factors before issuing loans to borrowers.
1.First, they checked collateral of the borrower. In the event of loan default, they would seize the collateral and recover the money.
2.Secondly, they checked and analyzed government lending program minutely.
Today, JPMorgan Chase & Co takes into account borrower's credit quality as well. They want to minimize the chances of foreclosures since this is not a profitable business anymore. The cost of foreclosure process is very high nowadays. Moreover, some local, state and federal governments have introduced laws wherein it is very expensive for lenders to recover losses.
Foreclosure is a long process. It takes a long time for the lenders to retrieve money. As per the data of RealtyTrac, in the year 2007, it took around 120 days to foreclose a house. That was the time when housing bubble was just beginning to burst. And in the first 3 months of 2014, it took almost 572 days or 1.5 years to foreclose a home.
Lenders are more vigilant than ever
Mortgage lenders have been giving a lot of attention to credit score of borrowers since the housing bubble. But, JPMorgan has taken a very bold step in showing its reluctance to have faith on government programs and insurance.
Situation would be really bad for borrowers if other mortgage lenders follow the path on which JP Morgan is walking. It would be more difficult for borrowers to obtain a mortgage loan in future, even though the existing government programs are there to to help credit flow to borrowers.
The total number of first-time borrowers would drop and slacken the speed at which people who lost their houses due to financial problems to buy homes yet again.
JPMorgan is lagging behind other mortgage lenders
Unlike JPMorgan, different small mortgage lenders have made easier underwriting standards in the last few months. Some small lenders are even willing to offer subprime mortgage loans to borrowers. Besides, as per recent report published by Ellie Mae, in the last 1 and half years, mortgage lenders have offered loans to borrowers with bad credit too.
Non banks are doing well than JPMorgan. Detroit's Quicken Loans has emerged as the 3rd biggest lender after Wells Fargo & Co and JPMorgan in the country in the first 3 months of 2014. In fact Quicken is a more powerful lender than bank of America Corp and Citigroup Inc.
The housing market is gradually shrinking as increasing mortgage rates have reduced refinancing demand and home sales. But the condition of JPMorgan is worse. It is shrinking much faster than its competitors. JPMorgan's market share has dropped to 8.1 percent in the initial 3 months of the year 2014. Last year, it's market share was 11.1 percent during the same time period. Besides, the bank has suffered a $74 million loss in the second quarter of 2014, in contrast to $566 million of income during the same time in 2013.
Well fargo has not revealed a detailed analysis of mortgage figures yet. But like JPMorgan, it's revenue has also dropped by 38.5% in the second quarter of 2014. Last year, it's revenue was $1.72 billion in the same time.
Clash of the titans – JPMorgan vs FHA
JPMorgan may take another year to come up with a new mortgage business strategy, but it has already started pulling back from offering loans made under the FHA, which gives an opportunity to first-time home buyers to finance around 96.5% of the cost of their house. These loans are quite popular as FHA guarantees them against default. However, JPMorgan and some major banks had a huge row with the FHA regarding some of the loans' eligibility for insurance.
In November 2013, the bank had a settlement with the Department of Justice (incidentally the regulator for Fannie Mae and Freddie Mac) for around $13 billion regarding mortgage related issues.
Besides, Jamie Dimon (CEO of JPMorgan) was utterly disgusted with the bank's $614 settlement with the FHA to obtain government insurance payments on the loans that were supposedly not qualified for coverage. Dimon had a very bitter experience while dealing with the FHA in February 2014. His recent comment is a burning example of that. To quote his words, “the real question to me is should we be in the FHA business at all and we are still struggling with that."
Dimon has even criticized FHA in front of his fellow colleagues. He and several other banks have felt that the FHA, Fannie Mae and Freddie Mac have deliberately harassed them over minor issues (like documents) so as to not make insurance payments.
Usually, most banks grumble when new regulations are introduced. But, JPMorgan's animosity and intention to change its business strategy is well evident from the market share data. Its share of government loans was only 1.7%, in contrast to 3.1% for throughout of 2013.
Instead they are offering more of jumbo loans, which are not even guaranteed by the FHA. JPMorgan is backing upon the wealthy borrowers and their assets to pay down huge mortgage. In fact, they are giving tough competition to other lenders on the prices of these loans and getting a bigger share of that business.
Conclusion
FHA officials have recently announced that they are taking several steps to make their rules transparent. In fact, they have introduced new rules in June 2014 so that lenders can finance borrowers without any fear or hesitation. On the other hand, Dimon had expressed hope that FHA will make some adjustments so that lenders can offer loans to marginal borrowers without getting severely penalized in future.