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Mortgages are in free fall at JPMorgan Chase

Origination volume totaled $21.9 billion from April to June, a decline of 11% compared to the prior quarter

JPMorgan Chase leaders Thursday provided a glimpse of what’s to come as mortgage lenders begin sharing performance data for the second quarter – and it’s not pretty.

Opening the earnings season, the bank reported double digit declines in originations, margins compressions and revenues in a free-fall, demonstrating how higher mortgage rates, the result of the Federal Reserve‘s tightening monetary policy, are hurting originators. 

To prepare for a potential recession in the U.S., the Jamie Dimon-helmed bank has been conservative in its servicing portfolio as the economy slows down.

According to Dimon, the U.S. economy continues to grow, touting both a healthy job market and consumer spending. But geopolitical tensions, high inflation and ongoing uncertainty regarding how high rates ultimately will go, are all very likely to have imminent negative consequences on the global economy.

On the bright side: “The consumer right now is in great shape. So, when we go into recession, they’re entering that recession with less leverage, in far better shape, than they did in 2020,” Dimon said during a call with analysts. 

But, so far, the landscape is hurting the mortgage business.

JPMorgan Chase, the fifth-biggest mortgage lender in the country, reported its origination volume totaled $21.9 billion from April to June, a decline of 11% compared to the prior quarter, while the consensus was down 2% to 8%. 

Originations decreased 45% in comparison with the second quarter of 2021. 

The bank experienced a larger decline in the retail channel, which has higher margins, originating $11 billion in the second quarter of 2022, down 27% quarter-over-quarter and 52% year-over-year. The retail channel went from 61% of the total origination in Q1 2022 to 50% in Q2 2022. 

Through its correspondent channel, origination volume reached $10.9 billion, a decrease of 36% year-over-year, but an increase of 14% when compared to the previous quarter.

JPMorgan’s home lending net revenue reached $1 billion in the second quarter, down from $1.3 billion in the same quarter in 2021 and $1.2 billion in the previous quarter of 2022. 

The bank’s servicing rights increased to $7.4 billion in the second quarter of 2022 from $7.2 billion in the previous quarter and $4.5 billion in the same period of 2021. 

Meanwhile, net mortgage servicing revenues declined 7% from $245 million in the first quarter to $227 million in the second quarter. However, this year’s numbers overall toppled those of the same period of 2021; in Q2 it was $31 million. 

According to a team of analysts at Keefe, Bruyette & Woods (KBW), the results were consistent with expectations for weak mortgage banking earnings, but the smaller-than-expected positive servicing mark could be more company specific.

“Gains on sale margins decreased -17 bps quarter-over-quarter, which was slightly worse than expected,” according to a report from KBW analysts. “However, about two-thirds of this appeared to be largely driven by the shift in channel mix (lower retail/ higher correspondent).” 

On the mortgage servicing portfolio, the analysts said given the move-in rates during the quarter, the MSR mark came in below expectations. 

“MSR valuation increased by just 2% quarter-over-quarter, which was smaller than expected. This could potentially reflect some conservatism on expected servicing costs should delinquencies pick up in a slowing economy,” according to the KBW analyst report.

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