A Seismic Shift Among Money Centers

 | Feb 07, 2014 | 3:30 PM EST  | Comments
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wfc

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c

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bac

The fourth-quarter bank call reports for 2013 are out and they provide a lot of insight into the shifting business strategies of each of the four money centers. One of the big shifts is the increasing focus by JPMorgan Chase (JPM) on domestic lending, specifically in the origination and retained servicing of first-trust residential mortgages. As I've written many times, only one of the four money centers has been continuously and consistently growing its residential mortgage business since the financial crisis of 2008-09, and that's Wells Fargo (WFC).

The withdrawal from that lending segment by the other three money centers -- JPM, Bank of America (BAC) and Citigroup (C) -- has allowed Wells Fargo the opportunity to operate largely unchallenged. Its primary competition has come from internal retail residential mortgage division competing with its wholesale division that provides mortgage capital to smaller mortgage originators. In the end, Wells Fargo profits from both divisions, though.

Beginning last year, however, with little fanfare, JPMorgan began to increase its participation in this space, which I wrote about in November, "JPMorgan Expanding in Mortgage Markets." That process continued and accelerated during the fourth quarter of 2013, with its book of residential loan originations and retained mortgages held in portfolio for servicing expanding while decreasing at the other money centers, including Wells Fargo.

Most interesting about the timing of this renewed interest in the residential mortgage space by JPM (and its expansion into it) is that it happened even as mortgage rates were rising at the fastest pace in U.S. history last year. The increase in rates caused an aggregate decline in the origination of both purchase and refinance loans, which plunged in the U.S. in the latter half of 2013.

Just as this caused the other money centers' business in this area to contract, it would have been logical to assume the same would have occurred at JPM. Anecdotally, this implies that JPM's commitment to this space as a long-term strategy for increasing its domestic lending business is substantial. This also marks a diversification in the business focus by JPM since the 2008-09 financial crisis. Its almost sole priority had been displacing Citigroup's dominance as the U.S.-based international bank and loan provider. (I'll address the status of JPM vs. C for international lending in a separate column.)

To put numbers to the domestic mortgage business, though, JPM's book of retained first-trusts increased in the fourth quarter of 2013 from the previous by about $1 billion, to about $134 billion. By comparison, the other three money centers experienced declines. Wells Fargo's book declined by about $4.5 billion to $243 billion. Bank of America's book declined by about $7 billion to $248.5 billion. And Citigroup's declined by $3 billion (the largest margin decline of the four) to $83.5 billion.

The numbers are even more revealing on an annual basis. JPM's book of retained mortgages grew every quarter in 2013 and represented almost half of the $10 billion growth in its total-retained-loan book during the year. This is the exact opposite of what occurred at the other money centers. WFC's mortgage book declined by about $22 billion for the year and its total loan book also fell by about $1 billion. BAC's mortgage book declined by about $20 billion, even as its total loan book increased by about $6 billion. And C's mortgage book decreased by about $12 billion as its total loan book increased by about $13 billion.

Looking at non-performing mortgages, WFC's retained book of defaulted mortgages remains at about $33 billion, representing no change in the past five years. I can't explain why Wells Fargo is not addressing or resolving its non-performing mortgages. Making this even more perplexing, Wells Fargo has a regional concentration of loans on the West Coast. The appreciation in real estate values and transactions there in the past 18 months should logically have afforded Wells Fargo the opportunity to resolve non-performing mortgages even more aggressively than the other money centers.

Every other money center shows a steady reduction in their retained non-performing mortgages. In the past year the value of non-performing mortgages at JPM, BAC, and C have all declined substantially -- by 30%, 33%, and 12% to $17 billion, $34 billion, and $7 billion, respectively. At some point it is logical that investors will begin to take note of JPM's increasing participation in the profitable domestic mortgage business and simultaneously consider the negative implications of this new challenge to Wells Fargo while questioning the treatment of non-performing mortgages by Wells Fargo.

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