J.P. Morgan’s Sweet Mortgage Deal




Large banks struck some advantageous deals in the midst of the credit crisis. Now, one appears to be paying off for J.P. Morgan Chase.


The deal in question relates to mortgage repurchases. During the boom, banks frantically made mortgages and then sold them to bond investors or government-backed agencies like Fannie Mae and Freddie Mac. Now, the buyers are scouring the mortgages, particularly defaulted ones, to see whether the original lenders failed to comply with agreed underwriting standards. If a bank extended a mortgage to a borrower without, say, required income documentation, the loan buyer can ask the bank to repurchase the loan or pay compensation.


These “repurchase” claims have soared, forcing banks to build up reserves to absorb potential losses. Additions to these reserves are booked as an expense. In the second quarter, these additions created a combined $2.85 billion hit at nine large banks surveyed by Barclays Capital, compared with $5.53 billion in all of 2009.


Yet J.P. Morgan seems much better positioned than its main rivals for repurchases. And that could have a lot to do with a deal it forged with government-backed mortgage buyers last year.


In September 2008, J.P. Morgan bought certain assets and liabilities of the failed Washington Mutual Bank. Then, in the first quarter of 2009, J.P. Morgan agreed to a deal with the government agencies that “resolved certain current and future” repurchase claims stemming from Washington Mutual mortgages. It isn’t clear how many loans were involved and what that settlement cost J.P. Morgan. In 2010, a bank filing merely said a $714 million hit in the first quarter of 2009 was “primarily related” to the deal.


But whatever the cost, it looks like money well spent.


The Washington Mutual repurchase exposure could have been particularly nasty. The bank wrote about $490 billion of mortgages from 2005 through the middle of 2008, and appeared to sell well over half of them. What is more, Washington Mutual specialized in option-ARM mortgages, which showed high losses and appear to be more vulnerable to repurchase demands.


Notably, Bank of America appears not to have forged a similar settlement with Fannie and Freddie for its Countrywide loans, and nor, it seems, has Wells Fargo for its Wachovia mortgages. That may be why the total pending mortgage-repurchase claims are lower at J.P. Morgan. The bank had $3.1 billion at the end of June, versus $4.3 billion at Wells and $11.1 billion at Bank of America. J.P. Morgan’s repurchase reserve looks a lot stronger, too. It is equivalent to 75% of pending claims, double the level at Bank of America and Wells.


Still, some questions remain. Did Fannie and Freddie settle with J.P. Morgan for too little, thus putting the taxpayer on the hook for faulty loans? Why didn’t Bank of America and Wells end up with similar settlements? And why didn’t J.P. Morgan give any indication of how much the deal cost till about a year after it happened?


Sweet deals sometimes don’t taste that way to everyone.


Write to Peter Eavis at peter.eavis@wsj.com



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