UPDATE: JPMorgan Cutting Exposure To Subprime Mortgages
Dow Jones Newswires - January 30, 2007 2:00 PM ET
By David Enrich
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--JPMorgan Chase & Co. (JPM) is cutting its exposure to subprime mortgages amid deteriorating industry conditions that are proving troublesome to a growing group of lenders.
JPMorgan Chief Executive James Dimon said in an investor presentation Tuesday that the company has sold most of the mortgage loans it made last year to people with weak credit histories. He said mortgages are the one area of subprime lending where "we really see something taking place that looks like a recession."
While the New York bank continued to hold $13.2 billion in subprime mortgages - making up 65% of its total subprime portfolio - as of the fourth quarter, that is down from $16.3 billion, or 72% of its total subprime portfolio, in the third quarter, JPMorgan said. Its overall subprime portfolio - which, in addition to mortgages, includes credit cards, auto loans and home equity loans - shrank to $20 billion from $23 billion in the third quarter.
Meanwhile, JPMorgan has classified $4.5 billion of its subprime mortgage loans as up for sale. The company says it expects them to be sold in the first half of the year.
JPMorgan said in the presentation that "loss severities" in subprime mortgages have started increasing, and that delinquencies of subprime loans originated last year are higher than the 2005 and 2004 vintages were at a comparable age. In the fourth quarter, JPMorgan saw net charge-off rates on subprime mortgage loans leap to 0.6% from 0.1% a year earlier.
When it released its fourth-quarter earnings earlier this month, JPMorgan boosted its retail bank's provision for loan losses to $262 million from $158 million a year earlier, due in part to what the bank described as "some deterioration in subprime mortgage." Dimon said Tuesday that even if defaults spiked to recession-like levels, it would probably only boost JPMorgan's credit costs by about $100 million a year. "This is not a particularly large risk for JPMorgan," he said.
With interest rates high and the housing market cooling, JPMorgan is hardly the only company struggling with subprime mortgages.
Wachovia Corp. (WB) recently shut down its EquiBanc Mortgage Corp. unit, following "an intensive strategic review of its mortgage business which has altered the company's approach to the origination of non-conforming loans," according to a message on EquiBanc's Web site. Countrywide Financial Corp. (CFC), the nation's largest mortgage lender, offered a gloomy forecast when it announced fourth-quarter results Tuesday, citing continued credit deterioration in the entire mortgage industry. And a number of small subprime lenders have gone out of business, while others have sold themselves to Wall Street firms.
But Dimon said JPMorgan won't be exiting subprime lending. In fact, he said, if mortgage loans become cheap enough, the company would consider buying multibillion-dollar portfolios from other lenders. "We're an economic animal," he said.
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When they start selling whole loans rather than securitizing you'll know they're in deep ****. |
