JPMorgan Chase mortgage results bode well for Wells Fargo

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Whither mortgage lending?

Many foreclosures are back on hold as the big banks wrestle with regulators over the price they must pay for botching their handling of distressed borrowers.

Bank of America, preannouncing its earnings, said in late June that it would record an additional $20 billion in costs stemming from its 2008 takeover of Countrywide Financial, the former mortgage goliath of Calabasas.

And the volume of new home loans is way down despite rock-bottom rates and sharply lower housing prices.

Yet when JPMorgan Chase & Co. released earnings Thursday, analysts found encouraging signs in its mortgage results. This despite the fact that the New York bank had to put aside $2.3 billion in legal costs such as the impending foreclosure settlement with state and federal officials.

A report from Keefe, Bruyette & Woods noted that Chase’s mortgage originations fell -- but less than expected. Meantime, profits rose on the sale of the home loans it did fund.

The amount of flawed mortgages that Fannie Mae, Freddie Mac and others are demanding that the bank repurchase grew 44%, but that’s part of an industrywide trend as the wreckage left by the mortgage meltdown is sorted out.

KBW bank analyst Fred Cannon found it encouraging that Chase’s reserve for repurchases ticked up only slightly.

All this bodes well for Wells Fargo, the giant San Francisco bank that depends heavily on its mortgage business and will report its second-quarter earnings next week. ‘We believe [Chase’s] mortgage banking results provide a positive read across to [Wells Fargo] mortgage banking revenues,’ Cannon and his colleagues wrote.

RBC Capital Markets analyst Gerard Cassidy also noted that Chase’s mortgage revenue and profit margin on loans looked good ‘although the costs associated with the mortgage debacle remain elevated.’ The trends should be the same for the other big originators including Wells and Bank of America, Cassidy said.

‘Long term the business obviously will be impacted by a likely improvement in the housing market,’ Cassidy said in an email, ‘but it takes time. Also, sound underwriting standards need to be maintained to keep the market healthy.’

We’ll know more Monday, when Wells, the largest writer of new home loans, reveals its results for the April-June period.

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-- E. Scott Reckard

Associated Press