In a speech to the US Chamber of Commerce, Jamie Dimon, CEO of JP Morgan Chase made a statement that caused my jaw to drop. From Bloomberg:
"My biggest mistake, probably of my whole career, was not closing down our mortgage broker business sooner."
He says that mortgage broker business had a loss rate two to three times higher than loans originated directly by the bank.
Here is what you need to know:
- Mortgage brokers originate mortgages.
- Banks, like Chase, underwrite and fund these mortgages. They also create many of mortgage programs that are not performing today. In fact one program that Chase had "back in the day" allowed 103% loan to value for credit scores above 700. Chase was also big into second mortgages up to 100% loan to value. Banks also employ(ed) heavily incentized wholesale reps to call on mortgage brokers–begging for loans to be sent to them.
So if a mortgage broker takes a loan application and submits the loan to Chase, it is Chase who makes the decision on whether or not the loan is acceptable to approve and fund. If JPMorgan Chase suffered double or triple the losses on loans provided to them by mortgage brokers, it was Chase's wholesale division (for mortgage brokers) that was the real issue with exception to cases of pure fraud.
Locally we had a classic example that made the front page of the Seattle Times. The report claims that six immigrants (one is a hot dog vendor) were prequalified to purchase Bellevue high-end condominium units with the developer's preferred lender, JP Morgan Chase Bank. There's a lawsuit pending over the lost earnest monies of $174,050.
"In one case, the lawsuit says, a Chase broker listed a prospective buyer's income not at the actual $2,147 a month, but at $12,500. Chase's underwriter "red flagged" the document as suspicious, the suit alleges, but the applicant still was prequalified for a $724,000 condo…."
Note: I contacted writer of the Seattle Time's article to ask she correct the term "broker"…the correct term in the above paragraph would be "loan originator" or they often like to call themselves banker/broker or bankers.
"Other plaintiffs are…Diana Shakhnazaryan…and her mother, Svetlana Kocharyan, both of whom fled Azerbaijan and gained political asylum here about 10 years ago. In 2006, Kocharyan worked on an assembly line and her daughter had a part-time job washing hair in a Kirkland beauty salon. Together, they made $3,659 a month, court documents say.
Chase prequalified them for a 95 percent mortgage for the purchase of a $922,600 condominium, giving them a $7,198 monthly payment, including condo dues."
In the same article, luxurious Bellevue Towers preferred lender, JP Morgan Chase, approved a student with an income of $3,600 a year and says he was told he prequalified for a $634,000 condominium.
Back to Jamie's presentation yesterday…in one breath, Jamie Dimon says:
"When I hear of constant vilification of corporate America, I personally don't understand it…I would ask a lot of our folks in government to stop doing it because I think it's hurting our country."
And then he turns around and vilifies mortgage brokers just a few moments later.
Fact is, now that Chase has purchased WaMU, they don't need mortgage brokers anymore. They have plenty of exposure with Washington Mutual's existing locations. Banks, like Chase, have used mortgage brokers as their sales force and now with their massive market-share, they just don't need them anymore. But why wrongly tar an industry…I thought we were beyond that…at least I believed Jamie Dimon was.
I'll wrap this post up with another quote from Jamie yesterday:
"If we act like a dysfunctional family and we don't finish these things and we're forever debating them, I think this will go on for several years."
Well that's one point I can agree with, Mr. Dimon. Why can't we all just get along?