JPMorgan pulls back from mortgage lending on foreclosure worries

NEW YORK (Reuters) - JPMorgan Chase & Co, the second-largest U.S. mortgage lender, is backing away from making home loans to less creditworthy borrowers after losing faith in its ability to recover much money from foreclosing on homes, even with government guarantees.

The shift reflects a change in the way the bank views its mortgage business: where before it viewed collateral and U.S. government lending programs as key backstops to most loans it was making, now it is determined to never have to foreclose.

To avoid loans that default, it is doing more work on establishing the capacity and willingness of borrowers to pay their loans. The bank is losing market share in government-backed loans, but is doing so consciously, JPMorgan executives told analysts Tuesday on a conference call.

"We maintained discipline regarding pricing to our required returns," Chief Financial Officer Marianne Lake said.

Lenders have broadly been paying more attention to borrowers' credit quality since the financial crisis, but JPMorgan is going a step further in its reluctance to rely on government loan guarantees.

If other lenders choose the same path as JPMorgan, it could be more difficult for first-time U.S. home buyers to secure financing, even though government programs are designed to help credit flow to these borrowers.

For now, JPMorgan seems to be going a different path from its smaller competitors, many of which have lowered their underwriting standards. Such lenders, particularly those that aren't banks, are increasingly willing to make subprime loans. Over the last 18 months lenders have been making loans to borrowers with lower and lower credit scores on average, according to mortgage data provider Ellie Mae, although the mean is still well within the "prime" category.

As JPMorgan pulls back from mortgage lending, non-banks are ramping up. The third biggest mortgage lender in the United States in the first quarter was Detroit's Quicken Loans, according to industry newsletter Inside Mortgage Finance, after Wells Fargo & Co and JPMorgan. Quicken is a bigger mortgage lender now than Citigroup Inc or Bank of America Corp.

JPMorgan?s market share fell to 8.1 percent in the first quarter of 2014 from 11.1 percent in the same quarter a year earlier, according to Inside Mortgage Finance, showing that it is contracting its business faster than rivals. The bank posted a $74 million loss from making mortgages in the second quarter, compared with $566 million of income in the same quarter last year. The bank has said it expects to lose money making home loans for the full year.

Wells Fargo does not break out its mortgage figures in exactly the same way, but its mortgage banking revenue fell 38.5 percent in the second quarter from the same quarter last year to $1.72 billion.

JPMorgan is pulling back in particular from loans made under the Federal Housing Administration program, which allows first-time homeowners to borrow as much as 96.5 percent of the purchase price of their house.

The government guarantees these loans against default, but Chief Executive Officer Jamie Dimon said he was frustrated when the FHA sued his bank over claims it made against the guarantees. The bank settled with the FHA in February for $614 million. [ID: nL2N0L928N] An FHA spokesman declined to comment on Dimon's remarks.

JPMorgan wants to reduce its chances of making loans to people who won't pay on time, Kevin Watters, chief executive of JPMorgan Chase's residential mortgage banking business in New York, told Reuters.

"The cost to take a customer through the foreclosure process is just astronomical now," Watters said. In addition to federal standards, states, and in some cases local governments, have written their own rules making it more expensive for banks to recover loan losses, he added.

"It just becomes very expensive to handle defaulted loans," Watters said.

(Reporting by David Henry, editing by Dan Wilchins and John Pickering)