JP Morgan Takes $1.5 Billion Mortgage-Backed Hit in July

That credit crisis we’ve been hearing pretty much non-stop about for over a year hasn’t gone anywhere, if a regulatory filing Monday afternoon by JP Morgan Chase & Co (JPM: 29.83 +1.98%) is any indication. In a filing with the Securities and Exchange Commission, the investment banking giant said that it took a $1.5 billion writedown on its mortgage-backed positions in July alone.

The writedown came as JP Morgan said that it “continues to be negatively affected by the disruption in the credit and mortgage markets, as well as by overall lower levels of liquidity and wider credit spreads,” and warned that both banking fees and client activity in its investment bank would suffer if the trend continued throughout the quarter.

It also comes on the heels of a fire sale of ABS CDOs by Merrill Lynch & Co. (MER: 0.00 0.00%) that saw the securities sold for 22 cents on the dollar (or 5 cents, if you count for Merrill’s financing of its own deal).

The company’s investment bank held $19.5 billion of prime and Alt-A MBS exposure and $1.9 billion of subprime MBS at the end of the second quarter. Outside of mortgage securities, JP Morgan also holds a $95.1 billion home equity loan portfolio, $14.8 billion subprime mortgage loan portfolio, and a $47.2 billion prime mortgage loan portfolio.

July was a tough month for much of the secondary market, according to HW’s sources; during the month, credit spreads reached levels last seen during the March meltdown that took down Bear Stearn & Cos. JP Morgan alluded to such in its filing, saying “trading conditions have substantially deteriorated versus the second quarter.”

JP Morgan pulled the plug on all non-agency loan products in its broker channel to start the third quarter, forcing any volume coming from its third-party origination channel to be salable to either Fannie Mae (FNM: 0.8419 +2.67%) and Freddie Mac (FRE: 0.8415 +2.62%), or FHA-based. The company will continue to underwrite jumbos via its retail mortgage channel, a spokesperson said.

JP Morgan CEO Jamie Dimon told analysts that the company’s prime book of mortgage business looked “terrible” in a conference call on July 17. Underscoring that outlook, the company said Monday that prime and subprime mortgage net charge-offs are expected to continue to rise significantly during the second half of 2008, with deterioration expected to continue into 2009, as well.

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Disclosure: The author was long FRE and held no positions in FNM, JPM or MER when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.