Jamie Dimon told the press on Friday that the mortgage crisis has been costly (but not TOO costly) for JP Morgan. From MarketWatch (hat tip Lisa Epstein):
J.P. Morgan Chase & Co. Chief Executive Jamie Dimon said Friday that the foreclosure process is a “mess” that’s cost the financial-services giant a lot of money.
Dimon also said litigation over troubled mortgage securities is “going to be a long, ugly mess,” but won’t be “life-threatening” for J.P. Morgan….
“It is a big mess, it has cost us a lot of money,” Dimon said Friday during a conference call with analysts. “Unfortunately, the only way to do it right is name by name by name.”
“We will do as many as we can. There is a lot of paperwork. The paperwork is different in every single state,” Dimon added, according to a transcript of the call.
“There were multiple checks and balances and there may be mistakes made in the foreclosure process, but they are very few and boy, when we find them, we try to make up for them right away,” the CEO said.
Now this might seem to be at least a chink in the bank party line, right? The JP Morgan chief actually admitted that the mortgage mess was costly business and that the big bank had made at least some mistakes.
Remember, these remarks came in a conference call in which JP Morgan announced higher than expected earnings for the fourth quarter. This is all posturing.
It is not clear that the high level of foreclosures would be costing JPM much money.
The increased costs of foreclosures for all serviced and securitized loans would presumably be passed on to investors. The bank might be paying more for staffing to manage the foreclosures, which would reduce the margin on the servicing fee.
The real intent is of Dimon’s comments to forestall calls for banks like JP Morgan (as opposed to chump investors) to bear more costs in connection with the mortgage crisis, via writing down second mortgages, taking putbacks, and incurring more expenses to facilitate mortgage modifications. The message thus is: “Despite these great earnings, we really are in a world of hurt in mortgage land, so don’t expect us to do more.” This positioning is no doubt intended to deflect criticism when the bank announces its bonuses, which are certain to be markedly higher than last year.
This is one of those myths the banking industry likes to perpetuate when it suits them. They piously pretend that they are taking their medicine and doing the hard and expensive work of fixing foreclosures. In reality, the costs are passed along and the risks of them doing a bad job are borne by someone else.
In addition, JP Morgan’s impressive-looking fourth quarter earnings were burnished more than a tad by under-reserving and the failure to take warranted writedowns (of course, if your regulators endorse extend and pretend, as they do, the banks get off scot free). JP Morgan has the second biggest book of junior mortgages, meaning second mortgages and home equity loans. The biggest four banks, which are also major servicers, have all taken to using seconds to extort borrowers who are delinquent on their first mortgages. If they were to foreclose, the seconds would be wiped out. But in cases where a borrower is trying to negotiate a mod or a short sale, the banks refuse to budge to preserve the fictive marks on their seconds. As law professor Katie Porter noted:
A persistent problem, pointedly described in these letters (July 10, 2009 and March 4, 2010) from Rep. Barney Frank to the large banks, is that the banks that hold second mortgages are not modifying those loans. (Yep, these are the same banks that took TARP money). The reluctance of the second lienholders to agree to a modification gums up the process for trying to get a modification on first, and usually much larger, mortgages. The investors in the first loan somewhat sensibly resist modifications, particularly those with principal write-downs, pointing out that it doesn’t seem right that they should take a haircut, while junior lienholders refuse to modify their loans.
In other words, some of last quarter’s $4.8 billion in earnings should have instead been applied to writing down JPM’s over $100 billion book of junior mortgages, particularly since $2 billion of those “earnings” came from reversing reserves taken for credit card losses.
In addition, other elements of the quarterly information looked to be weighing too light on residential mortgage risk. The bank originated $50.8 billion of new mortgage loans (loan origination fees were $749 million in the fourth quarter), yet made no reserves against them. Given that the GSEs are now vigilant about putbacks, wouldn’t realistic accounting require an ongoing reserve for originations, since the possibility of future representation breaches exists (especially given recent history) and the amount is unknown?
Banks like Chase face little in the way of competition, enjoy the benefits of super low interest rates, which is a transfer from savers to the financial system, and even worse, will be able to dump risk onto taxpayers if it screws up again in a serious way. Yet the executives and producer classes in big banks continue to earn lavish pay when the banks should instead be building stronger capital bases. It clearly benefits Dimon sound contrite rather than gloat too much about how much easy money he is making.