JPMorgan Chase & Co. and Wells Fargo & Co., prompted by U.S. regulators, took almost $1.4 billion in charge-offs on home-equity loans and other mortgages to borrowers who filed for bankruptcy protection.
JPMorgan wrote off $825 million in loans in the third quarter, 87 percent of which were home-equity loans, the bank said today while reporting third-quarter earnings. The guidance by the Office of the Comptroller of the Currency led Wells Fargo to increase net loan charge-offs by $567 million, which was covered by reserves, the San Francisco-based bank said.
The OCC issued guidance in July on how banks should account for so-called troubled debt restructurings, or TDRs, if the lender doesn’t expect payment in full of both principal and interest. The move reflects the tougher stance by new Comptroller Thomas Curry, who took over in March, said Clifford Rossi, a finance professor at the University of Maryland.
“There has been a sea change with Curry there,” Rossi said. “From a supervisory standpoint, the OCC is going to start to scrutinize these type of positions more.”
JPMorgan’s nonaccrual loans increased by $1.7 billion because of the decision, the New York-based bank said. Wells Fargo moved $1.4 billion in loans to nonaccrual status, including $1 billion in first mortgages and $262 million of so-called junior liens, the company said in a statement.
“We would expect, given the characteristics of the loans we were asked to charge off, that we will receive that value back in the form of principal payments over time,” JPMorgan Chief Financial Officer Doug Braunstein told reporters on a conference call.
The regulatory change caused JPMorgan’s home-equity charge-off rate, which excludes so-called purchase credit-impaired loans, to surge to 6.22 percent from 2.82 percent a year ago and 2.53 percent in the second quarter. Without the charge, and excluding PCI loans, the charge-off rate would have been 2.23 percent, the largest U.S. bank said in an investor presentation on its website.
Braunstein said that 97 percent of the loans are currently paying, with about half paying on time for more than two years.
While the OCC directive will probably increase third-quarter charge-offs and non-performing assets, it isn’t “fundamentally at odds” with a broader pattern of improved asset quality in U.S. banks’ mortgage books, Fitch Ratings said in a note today.
“We view these prospective losses as reflections of accounting clarifications rather than economically significant changes,” Fitch said.
Citigroup Inc., the third-biggest U.S. bank, had $37.2 billion of home-equity loans at the end of June, according to a quarterly filing. About $1.6 billion of the loans, or 4.3 percent, were more than 30 days late, according to the filing.
The home-equity loans are in Citi Holdings, the division created by Chief Executive Officer Vikram Pandit to hold assets tagged for sale. Citigroup has sold about $14 billion of mortgages since 2010, about 60 percent of which were delinquent, CFO John Gerspach said last month. The New York-based bank reports third-quarter earnings Oct. 15.
Bank of America Corp., the lender that rescued Countrywide Financial Corp. in 2008, had $118 billion in home-equity loans at June 30, with 1.1 percent at least 30 days overdue, the Charlotte, North Carolina-based company said in a July 18 presentation. Bank of America, the second-largest U.S. lender, reports earnings Oct. 17.
U.S. Bancorp, the nation’s fifth-largest lender by deposits, had $17.5 billion in home-equity and second mortgages at June 30, according to a filing from the Minneapolis-based company. About 1.9 percent were marked as overdue or non-performing.
Some banks have been “playing catch-up” on home-equity losses, said Bert Ely, an Alexandria, Virginia-based bank consultant.
“There has been a sense overall that banks in general and some banks in particular have not reserved sufficiently for future losses,” Ely said of their home-equity portfolios.
Regulators may also be seeking to adjust for banks cutting back too much on loan-loss reserves in general, he said. Comptroller Curry said on Sept. 20 that he was concerned banks were getting too much of their profit gains from slashing reserves.
The OCC said in the June accounting advisory that in cases of TDRs, banks should “charge-off the excess of the loan’s carrying amount over the fair value of the collateral as uncollectible and the bank should place the remaining balance on nonaccrual.”
Lawrence White, an economics professor at New York University’s Stern School of Business, said the change is “very sensible.”
“You can’t have banks doing the extend-and-pretend game where they ignore changed circumstances in the hope that maybe something will work out,” White said. “It’s just not a good way for a prudentially regulated financial institution to be behaving.”