Calculated Risk beat us to it, but we think it’s worth highlighting the parts of this morning’s JP Morgan conference call where CEO Jamie Dimon and CFO Douglas Braunstein answered questions from analysts about the foreclosure scandal.
The bank had just announced that it would now be reviewing 115,000 foreclosure cases in 41 states, and the executives tried to sound mostly unconcerned about the eventual financial impact of resolving the process.
Guy Mozkowski of Merrill Lynch started by asking about the timing of resolving these cases and the extent to which they will affect the bank’s litigation reserves.
Q: I just wanted to dig in a little bit more of the foreclosure issues. I know you can’t talk too much more about them what you have said, but I was wondering if you can give us any sense for timing of resolution in terms of reopening these 115,000 cases?
A: It’s going to take several weeks to go through the files and make sure and correct any errors that are in there. Remember, we believe the underlying stuff is all accurate, okay? That’s the key substance. Obviously we know there’s a lot of state AGs. We’ve had conversations with them. We’re hoping that the normal process – to us the sooner the better for everybody involved. We don’t think there are cases where people have been evicted out of homes where they shouldn’t have been. These foreclosures go through multiple processes, and so we’re hoping it will be sooner rather than later, but those conversations are starting to take place.
Q: And is it fair to assume that at least a fair portion of that litigation reserve that you added to is specifically for this topic?
JPM: No. There’s nothing in it for this topic. I think the way you should look at this topic is that we’re bearing today $7 billion of charge-offs, foreclosure, repurchase costs. Reserves. That 7 billion will go up or down based on the economy and stuff like this. I’m not sure stuff like this is going to dramatically change that number. It may extend it a bit longer and stuff like that, but – and remember we have in total between repurchase reserves $11 billion – we have 14 billion for reserves for repurchases or loan losses, and look, the mortgage thing, we’re half way through all of this. We think we should continue and get done and make sure we do the right things for the consumers, the investors, and the country. And so it obviously will increase our costs a little bit and maybe we’ll have to pay penalties eventually to some of the AGs but we really think we should just continue.
Jeff Hart of Sandler O’Neal then asked about the expected impact on the overall housing market:
Q: Okay. And the foreclosure stuff, outside of how it directly may impact you or somebody else, how do you look at the drag it may have on the housing market, kind of the macro impact? What do you think about that?
A: Well, again I hope – this is a hope. This is not a knowledge. Is that when people take a deep sigh of breath, you go back to the right, look at the substance underlying the files, and you go back to modifying, foreclosing and doing the right thing, all told, and it could be a blip. If you talk about three or four weeks it will be a blip in the housing market. If I went on for a long period of time, it will have a lot of consequences, most of which will be adverse on everybody.
Mike Mayo of CLSA requested more clarification on the timing:
Q: The foreclosure suspension, it’s a matter of weeks instead of months. Did I hear you say that?
A: No, it will take weeks to clean up the files, but we have to have little in-depth conversations with regulators and AGs and stuff like that. So I don’t know exactly when. I’m hopeful that it all starts to move at one point. I don’t know it’s going to be three weeks or five, but I think it will be a real shame if we don’t get this resolved and moving again.
Q: So in all likelihood you should be allowed to foreclose as we go into next year?
A: Yes, I hope so. But it’s not up to me.
Chris Kotowski of Oppenheimer asked about JP Morgan’s use of the troubled Mortgage Electronic Registration Systems Inc, and it turns out the bank “stopped a while back using them”:
Q: And then on a separate issue, just can you comment with how comfortable you are about the robustness of the MER system? I mean, people have raised issues about MERs being both principal and agent and the separation of…
JPM: We stopped a while back using them for that purpose. So I don’t think it’s as relevant as other people. And we’re not going to comment on all the underlying things. One of the things you’ve got to remember, there are – we’ve known there are issues in the mortgage business. And but for the most part, by the time you get to the end of the process, you’re not – we’re not evicting people who deserve to stay in the house.
Moshe Orbach of Credit Suisse wanted to know how the foreclosure mess will affect the value of mortgage servicing rights:
Q: Doug and Jamie, could you maybe talk a little bit about whether you think the model going forward on the mortgage side changes as a result of this, where it’s expectations of servicing costs, how the MSR is valued? Is there something structural that’s going to change as you kind of go through these processes and everybody else is doing the same thing?
A: No. Look, the spread also go up and down. It’s still such a critical product for the American consumer. We don’t know how the GSE is going to be redone or the mortgage markets and we do think a lot of work needs to be done on both. But at the end of the day, servicing mortgages and originating mortgages for client also still be a good business with what we think is a good return. And the MSR, I think the only material change in the MSR is when we all decide the rates are low and low forever and never gets any lower and mortgage rates are low and low forever, MSR is one big iota, and how we handle that MSR might be a little bit different.
And a hint of exasperation after this follow-up from Nancy Bush of NAB Research:
Q: First related to the foreclosure issues and whether there are going to be any extraordinary expenses associated with that, and is the level of expense and that whole activity now going to be higher going forward?
A: Nancy, I think I already mentioned that the way I look at it, we’re bearing $5 billion charge-offs a year, a billion dollars of repurchase reserves a year, a lot of foreclosure which I forget offhand, but big numbers. Those numbers may bounce up and down and probably will go up a little bit because of this, but I’m not sure they’re going to materially change because of this.
Related links:
Sacrificing servicers on the altar of Hamp – FT Alphaville
The MBS mess from the beginning – the deal docs - FT Alphaville
MERS, an acronym of mass foreclosure destruction – FT Alphaville