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JPMorgan to Gain from Expected Recovery in Mortgage Business

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The performance of JPMorgan Chase & Co.’s JPM mortgage banking business has not been great for the past few years and hence the unit has been a matter of concern. While the company’s mortgage fees and related income increased 62% in 2019 on a year-over-year basis, the same has declined, witnessing a four-year (2016-2019) CAGR of 6.5%.

Robert Segnini, the head of retail and consumer direct mortgage underwriting, told employees that JPMorgan lost almost $850 million in 2018 originating home loans through its retail channel.

Segnini stated, “Early 2019 was a depressing time for a lot of us.”

However, the unit's performance is expected to improve in 2020. Demand for mortgage loans is already on the rise, driven by decline in interest rates. In fact, JPMorgan has started to automate and digitize its home-lending business to reduce costs and attract more home buyers. Supported by such cost-cutting efforts along with an improving economy, the mortgage business is expected to recover in the near term.

There is growing optimism within the company’s executives that 2020 will be a comeback year for JPMorgan’s mortgage business. Segnini said, “We could go from, over a two-year period, losing almost a billion, to breaking even, to kind of making $300-plus million. The economy is working for us in 2020.”

Even till mid-2019, people did not expect that mortgage originations would improve in 2020. However, with home values rising and mortgage rates at three-year lows, mortgage originations have already started to increase and we can see signs of a turnaround.

JPMorgan’s home-lending business includes mortgage originations, mortgage servicing and portfolios of real estate loans kept on the bank’s books. The unit as a whole has been profitable for the past five years. This is because the mortgage origination business benefits when rates decline, while the mortgage servicing business benefits when rates go up, thus offsetting each other to some extent.

Notably, because of complicated regulations and tougher capital rules after the financial crisis, mortgage volumes continued to decline. Most of the big banks began to scale down their operations and pulled back from the riskier markets.

In fact, amid a decline in volumes, most of the big banks don’t originate as many mortgage loans through government programs as they should. The Federal Housing Administration (“FHA”) insured mortgages are more profitable as it provides insurance on mortgages that are originated by lenders for low-income borrowers, who otherwise would not be eligible for home loans because of their low credit scores.

Even JPMorgan started shrinking its FHA-backed lending operations in 2017 as “aggressive use” of the False Claims Act ("FCA") made it too risky and also resulted in increased legal woes.

However, following the initiative taken by the Housing and Urban Development (“HUD”) to ease worries related to mortgage sanctions in October 2019, the bank is planning to restart offering mortgage loans insured by the FHA.

Thus, amid signs of a revival of the mortgage market, if JPMorgan starts originating more FHA-insured mortgage loans, it would help in relieving pressure on net interest margin to some extent. However, the company might face competition from other FHA loan providers like Penny Mac Financial PFSI and Flagstar Bancorp, Inc. FBC.

Shares of JPMorgan have gained 25.5% over the past year, outperforming 14% growth recorded by the industry.

Currently, the stock sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Among other big banks, Wells Fargo & Company WFC, which was the largest mortgage originator in the United States as of 2017, has also been witnessing lower mortgage servicing income. Its mortgage banking income has witnessed a negative three-year (2016-2019) CAGR of 23.6% despite a reversal in the mortgage market.

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