JPMorgan Sees Income Fall 50 Percent as Mortgage Woes Bite Big

JPMorgan Chase & Co. (JPM: 39.60 +4.46%) said Wednesday that 2008 first-quarter net income fell to $2.4 billion, or $.68/share, compared to $4.8 billion, $1.34/share, one year earlier. Driving the drop in income were sizeable mortgage-related losses, including $1.1 billion in loan loss provisions tied to JPMorgan’s home equity portfolio, and another $2.6 billion in write-downs tied mostly to mortgages spanning all credit classes and underwriting programs.

The message from banks like JPMorgan and Wells Fargo (WFC: 31.20 +5.16%), both of whom reported earnings Wednesday, seems to be that consumer credit is increasingly in trouble, although JPMorgan did meet analyst expectations for earnings — leading to a requisite bump in share price, fueled also by remarks made on a conference call by CEO Jamie Dimon.

JPMorgan’s investment banking operations posted a loss of $87 billion for the quarter as revenues fell more than 50 percent from one year earlier. The firm provisioned $618 million for future credit losses, up dramatically from the $200 million charged in similar provisions just one quarter earlier as JPMorgan transfered $4.9 billion of leveraged lending commitments into its portfolio from a prior classification as held-for-sale.

Loss provisions in investment banking, however, paled in comparison to the provisions booked in the company’s retail financial servicing segement (which includes mortgage banking). A whopping $2.5 billion was set aside for future credit losses, the vast majority of which JPMorgan said was tied to expected losses in home equity loans held in its portfolio. Home equity charge-offs accelerated dramatically as well, reaching $447 million in Q1, compared to $68 million in the year-ago period.

Despite the losses, and somewhat paradoxically, JPMorgan said its Chase banking unit generated a 10 percent increase in average home equity loans during the quarter. For a product that’s bleeding so much money on the back end, you’ve got to be surprised to see the firm actively increase its exposure to the earnings drain.

Overall originations were up as well, JPMorgan said, with quarterly production reaching $47.1 billion, up 30 percent from year-ago levels. The company’s servicing portfolio continued to expand as well, reaching $627.1 billion, up 15 percent.

JPMorgan made headlines a few weeks ago by agreeing to acquire Bear Stearns in a historic bail-out move orchestrated by officials as the Federal Reserve and the Treasury Dept. CEO Jamie Dimon indicated to analysts on a conference call Wednesday that the acquisition was moving ahead as planned, although company execs said later that it was “too early” to estimate the number of jobs that will be lost due to the takeover.

Dimon also suggested — as with Morgan Stanley CEO John Mack and others — that the end of the current credit crisis is in sight. From Bloomberg:

Dimon .. said on a conference call … that the credit-market crisis is more than halfway finished as financial firms reduce leverage, and may be as much as 80 percent over.

“That side is working itself out,” Dimon said. “That doesn’t mean the recession won’t get worse or better.”

Dimon also said that real estate in the U.S. was “getting worse,” and pegged housing price declines nationally in 2008 at 9 percent, an estimate that puts him somewhere between the Pollyanna-ish National Association of Realtors (1.4 percent price decline) and PMI Group (PMI: 4.31 -0.69%) chief economist David Berson, who predicted a 20 percent peak-to-trough price decline last week.

Disclosure: The author held no positions in JPM or PMI when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.