JP Morgan, Morgan Stanley Pull Back on Mortgages
It can seem like banks and non-bank lenders are stuck in a repeating loop these days: tighten lending standards, tout new standards as proof of commitment to sustainable lending, discover losses are still mounting, so tighten lending standards some more. And so the loop has gone on for many mortgage lenders in the current cycle. The latest two firms to tighten their belts around mortgages are two of Wall Street's finest: JP Morgan Chase & Co. (JPM) and Morgan Stanley (MS). JP Morgan pulled the plug on all non-agency loan products in its broker channel late last week, forcing any volume coming from its third-party origination channel to be saleable to either Fannie Mae (FNM) and Freddie Mac (FRE), or FHA-based. American Banker first reported on the program changes at JP Morgan, which come as the Wall Street firm saw earnings drop 53 percent in the second quarter. The company currently holds $34.4 billion of jumbo mortgages, along with $2.5 billion of Alt-A mortgages. Net charge-offs among prime loans in the second quarter rose to $104 million, more than double the $50 million recorded just one quarter earlier. JP Morgan jumped in headlong into jumbos and Alt-A mortgages during 2007 — obviously an ill-timed bet, given where the market has headed. JP Morgan CEO Jamie Dimon told analysts that the company's prime book of business looked "terrible" in a conference call with analysts July 17. The company will continue to underwrite jumbos via its retail mortgage channel, a spokesperson said. Morgan Stanley puts the freeze on HELOCs Morgan Stanley froze several thousand home equity lines of credit over the weekend, as well, according to various sources that spoke with HW. Bloomberg News also reported on the freeze, noting that the bank's action came on lines of credit tied to properties that have seen price declines in recently months; Morgan Stanley is also said to be reviewing its HELOC limits monthly now, as price declines continue in key geographic locations. "Consistent with the terms of the HELOC, or home-equity line of credit, Morgan Stanley periodically reassesses client property values and risk profiles," Christine Pollak, a company spokeswoman, told Bloomberg. "A segment of clients was recently notified of a change in the status of their home equity line of credit or HELOC due to a change in the value of their property and/or their credit profile." Morgan Stanley is not the first to freeze or cut its HELOCs amid declining equity; Washington Mutual Inc. (WM) reportedly suspended or cut a total of $6 billion in HELOCs in May. See HW's complete report here. The Federal Deposit Insurance Corporation recently warned the banks it regulates on guidelines for managing HELOC freezes, suggesting that blanket freezes of lines of credit may violate Truth-in-Lending guidelines. Investment banking operations such as Morgan Stanley, however, do not fall under the FDIC's regulatory umbrella. HELOC delinquencies are becoming more problematic for bank and non-bank lenders alike. According to data compiled by the American Bankers Association, delinquencies among lines of credit rose for the sixth straight quarter in Q1 2008, reaching their highest level in over a decade. The percentage of HELOC accounts that were more than 30 days past due rose 14 basis points to 1.10 percent during the first quarter on a seasonally-adjusted basis — the 14bp jump is the highest linked-quarter jump in HELOC delinquencies since the ABA began keeping records in 1987. Disclosure: The author was long FRE, and held various put option contracts on WM, when this story was published; other indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.