Should We Believe Jamie Dimon’s Croc odile Tears Over How Much Mortgages Have Cost Banks?

Should We Believe Jamie Dimon’s Crocodile Tears Over How Much  
Mortgages Have Cost Banks?
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.

Not really.

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.






naked capitalism 1/15/11 2:08 AM Yves Smith Banana republic Banking  
industry Credit markets Real estate Regulations and regulators Risk  
and risk management Comments

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