J.P. Morgan Chase JPM, -0.57% on Thursday reported earnings and revenue that beat expectations, with trading and investment banking revenues contributing the most during the quarter. But the company’s CEO used his annual letter to push for a different business line, one which has fizzled in recent years. “It is no surprise the financial crisis, which was caused in part by poor mortgage lending practices and which caused so much pain for American families and businesses, led to new regulations and enhanced supervision,” Jamie Dimon wrote. “We needed to create a safer and better functioning mortgage industry. However, our housing sector has been unusually slow to recover, and that may be partly due to restrictions in mortgage credit.”
Dimon then devoted about 1,400 words to a discussion about the regulations put in place since the subprime crisis. An overly onerous regulatory burden, he argued, has reduced mortgage lending by about $300 billion annually — or the equivalent of about 3 million home loans since the crisis. “Our economists think that $1 trillion of loans could have increased GDP, in each of those five years, by 0.5 [percentage points],” he wrote. Dimon is especially critical of the Federal Housing Administration, the government mortgage-buying agency that stepped up in the depths of the crisis when Fannie Mae and Freddie Mac were still on their knees.
The FHA has drawn fire because of its aggressive use of the False Claims Act, legislation that was intended to protect the government from fraud, but which many industry participants say has been used to wring money from banks. That’s caused banks to flee from FHA lending, leaving “non-banks” as its primary lenders. And even some non-banks aren’t happy with the situation: Quicken Loans sued the government after being fined.
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“A first step to increasing participation in the FHA program could be the communication of support for only using the FCA, as originally intended, to penalize intentional fraud rather than immaterial or unintentional errors,” Dimon wrote.
He also calls for uniform standards for servicing mortgages, noting that “new mortgage rules and regulations total more than 14,000 pages and stand about six feet tall.” Treasury could take the lead on this effort, Dimon writes, as it did when it developed initiatives to help homeowners in distress.
In particular, he notes the enormous costs associated with servicing a troubled mortgage: $2,386, or more than 13 times the $181 it costs to service a healthy loan, according to Mortgage Bankers Association data. That’s keeping all lenders from extending credit to borrowers who don’t have pristine credit histories. Wells Fargo WFC, -2.41% and Citi C, -0.58% , both of which also announced earnings Thursday, said their mortgage servicing businesses declined 46% and 64% compared to a year ago, respectively. At J.P. Morgan, it’s up 7% compared to the same period a year ago, however.
Dimon’s proposals aren’t new, though it may be the first time someone of his stature has taken such a formal opportunity to argue for them. But it’s worth pointing out a few other post-crisis developments which may also be keeping a lid on mortgage lending: skittishness about homeownership, pricey rents that make it hard to save up a down payment, scant inventory that’s pushing home prices higher, and more.
Source By marketwatch….