Wells Fargo & Co. and JPMorgan Chase & Co. labeled $3.3 billion of junior liens as bad assets after regulators pushed the nation’s biggest banks to rethink the value of second mortgages whose collateral has vanished.
Wells Fargo classified $1.7 billion of junior liens as nonperforming in the quarter, leading to an increase in overall soured loans, and JPMorgan gave that designation to $1.6 billion of such loans, according to their first-quarter presentations today. Both banks cited federal guidance for the change.
U.S. regulators last year were examining whether lenders were accurately valuing $845 billion of home-equity and other second-lien mortgages and setting aside enough reserves, according to people with knowledge of the matter. Holders of second liens can be wiped out when home prices decline and a borrower defaults because lenders holding first mortgages typically are entitled to all the remaining collateral.
“We’ve identified those high-risk seconds early, we put reserves against them early, and so our reserves remain unaffected,” Doug Braunstein, Chief Financial Officer of New York-based JPMorgan, said on a conference call today with analysts. Wells Fargo CFO Timothy Sloan said during his conference call the impact on earnings at his San Francisco-based bank was “immaterial.”
JPMorgan and Wells Fargo said the reclassified loans are junior to other loans that are overdue, a warning sign that their own stake may be headed for a write-off. Wells Fargo said total nonaccrual loans rose to 2.87 percent of total loans in the first quarter from 2.77 percent at year-end. JPMorgan said its total nonaccrual rate jumped to 1.47 percent from 1.38 percent three months earlier.
Wells Fargo held $103.5 billion home-equity loans and lines of credit at the end of March, decreasing from $106.6 billion in December. JPMorgan’s dropped to $97.5 billion at the end of the quarter from $100.5 billion at year-end.
Bank of America Corp., which had been the largest U.S. home lender during the peak of the housing bubble, had the largest second-lien portfolio at year-end with $122.1 billion in unpaid balances, according to Inside Mortgage Finance, the industry trade publication. The Charlotte, North Carolina-based bank reports results next week.
Regulators and lawmakers have been sounding alarms since at least 2009 about the value of second mortgages. The Federal Deposit Insurance Corp. sent a letter to banks in August 2009 asking them to consider boosting reserves for second liens, citing the impact of overdue first mortgages. Barney Frank, then the chairman of the House Financial Services Committee, sent a letter to lenders in March 2010 urging them to recognize more losses because “large numbers of these second liens have no real economic value.”
Bankers including Wells Fargo Chief Executive Officer John Stumpf have responded that American borrowers tend to meet their obligations and pay their bills as long as they are able, regardless of whether the value of their homes has declined. That’s because they want to keep access to the account and draw on the unused portion of their credit lines, according to a Federal Reserve Bank of Philadelphia study in December 2010.
Of JPMorgan’s $1.6 billion of second liens that were deemed nonperforming, $1.4 billion were still current as of March 31, the bank said. Sloan said in an interview that 12 percent of the $1.7 billion of loans Wells Fargo moved were past due, and that the bank has adequate loss reserves. “We’ve taken the potential risk of these loans into consideration,” he said.
Stumpf told analysts that 90 percent of “underwater” mortgage borrowers in the U.S. are still current on payments. “Americans by a vast majority want to pay their bills if they have the income to do it,” Stumpf said today. He said problems arise mainly when borrowers lose their jobs, in which case the loss to the bank tends to be “almost complete.”
Jamie Dimon, JPMorgan’s CEO, told analysts the bank began looking at the loans in past years and was surprised to find second-lien borrowers were still current even after they’d stopped paying on their primary loan.
“But when we analyzed it, it was pretty obvious it was just a timing difference,” Dimon said, adding this prompted the bank to begin building reserves years ago. “In almost all cases the first went delinquent, the second eventually went delinquent. And in all cases, where the first went into foreclosure, the second was a loss, basically a total loss.”