How to Make Your Mortgage Business Recession Proof

The mortgage industry has taken a beating in the past year.
Some lenders are expected to loosen their credit standard to improve profits.
But JPMorgan Chase is ceding market share — intentionally.
Anticipating recession, the bank has been reinforcing its mortgage business to make it recession-proof — even if it means sacrificing market share and profits in the near term.
“It is a tough time to be in the mortgage business,” Gordon Smith, the CEO of Consumer and Community Banking at JPMorgan Chase, said Tuesday at the bank’s investor day.

Indeed, the mortgage industry has taken a beating in the past year amid intensifying competition, rising costs, and dwindling home sales.

At JPMorgan Chase, one of the largest US residential mortgage lenders, originations fell 29% to $79 billion in 2018.

That in part caused mortgage production revenue to drop sharply to $370 million — less than half of the $640 million tally in 2017 and a third of the $850 million it earned in 2016. Overall mortgage fees declined 22% to $1.25 billion in 2018 from $1.61 billion in the previous year.

Because JPMorgan is the largest US bank, its every pivot and parry is closely watched by competitors and the business community writ large.

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But anyone expecting executives discussing these figures at the investor day to don a gloom-and-doom demeanor or unveil a battle plan to reclaim market share and profits were dearly disappointed.

To the contrary, JPMorgan signaled it was perfectly content to cede market share to competitors and in fact had done so on purpose.

“Where we’ve lost share, it’s been intentional,” the bank’s chief financial officer, Marianne Lake, said.

To what end? Count up the roughly dozen times senior execs said “recession” or “downturn” during their presentations and you get a clue as to what’s driving their strategy.

The bank is taking great pains to make its mortgage business recession-proof — even if it means sacrificing market share and profits in the near term.

“We’re not waiting for a recession and then to act on the recession,” Smith said. “We monitor credit performance hourly, daily, weekly, monthly.”

As Smith explained, JPMorgan has been preoccupied with “de-risking” its mortgage business. It has rebalanced its portfolio, focusing on prime loans to borrowers with top-notch credit scores.

So, while originations and revenue have fallen, so have delinquencies on the mortgages they hold or service. Their delinquency rate on servicing declined 28% in 2018, and the bank recovered more delinquent loans than it charged off — something that didn’t happen in the preceding four years.

JPMorgan 2019 investor day screen shot
JPMorgan Chase
This isn’t necessarily the tack every mortgage lender is taking. Moody’s wrote in a report this month that in the face of the industry’s economic headwinds, residential mortgage originators are expected to “loosen underwriting standards for purchase loans, which will lead to modest growth in residential mortgage balances.”

Amid the loosening, Moody’s expects loan delinquencies, which have been hovering near postcrisis lows, to increase modestly over the coming year.

Much of this loosening will come from smaller companies that specialize in home lending, according to Warren Kornfeld, a senior vice president covering financial institutions at Moody’s. Global behemoths like JPMorgan have the flexibility, given their business diversity, to back off if they spot foreboding economic storm clouds.

“They have a greater ability to step back from a market if profitability and risk/reward opportunities are subpar,” Kornfeld said.

Grasping for profits by reaching down the credit spectrum is a double-edged sword. Looser lending standards mean a greater risk that some of those loans don’t get paid back and turn red on the income statement.

JPMorgan isn’t willing to let that happen.

“Given the expense, plus headline risk, banks really do not want to service delinquent loans, especially on loans that they own,” Kornfeld said. “The common thread in the market is that banks are focusing on their core customers with residential mortgage lending.”

Read more:
Americans stopped buying homes in 2018, mortgage lenders are getting crushed, and an economic storm could be brewing
JPMorgan Chase shared a slide with investors that explains why mortgage lenders are getting smoked
Home sales continue to get whacked, falling to a 3-year low, and an increase in mortgage delinquencies is looming
Rust-belt cities that got killed in the recession are making comeback, and they’ve become the best places for millennials to buy a home

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