Posted on 14 Oct 2010
James Dimon, CEO of J.P. Morgan Chase & CO., vowed to root out any flawed foreclosure-sale paperwork as the nation's largest bank in stock-market value widened a review of its practices to 41 U.S. states.
Mr. Dimon said the New York company might have to "pay penalties" related to the investigation of "robo-signers" announced Wednesday by attorneys general from all 50 states. But the costs are likely to be "incremental," he said, defending the company's documentation procedures for foreclosures.
No one has been "evicted out of a home who shouldn't have been," Mr. Dimon said.
The comments came as J.P. Morgan reported a 23% jump in third-quarter earnings to $4.42 billion, or $1.01 a share. The results failed to impress many analysts and investors because the increase came largely from setting aside $4.88 billion less for future loan losses in the latest quarter than the bank did a year earlier.
Net revenue fell 11% to $23.82 billion, while loan growth remained stubbornly anemic, deepening investor concerns that U.S. banks will be unable to replace sources of income being squeezed by looming regulations.
Weaker trading results dragged down earnings at the company's investment bank by 33%, and J.P. Morgan chopped compensation levels in the unit by 31%. The investment-banking business's profit of $1.29 billion was the worst showing for the unit since the fourth quarter of 2008.
The inconsistent performance at what is widely considered one of the best-managed financial firms in the world is a troubling sign as banks and securities firms gear up to report third-quarter results.
"This doesn't bear well for the rest of the earnings cycle," said Paul Miller, a banking analyst at FBR Capital Markets. J.P. Morgan is "considered one of the better companies, and they did not get the benefit of the doubt."
Bank of America fell 1.7%, or 23 cents, to $13.29, while Goldman Sachs Group Inc. was down 48 cents, or 0.3%, to $154.73. Morgan Stanley rose one cent to $25.94, and Citigroup Inc. was up a penny to $4.25. Those four companies report earnings next week.
Some analysts saw a silver lining in J.P. Morgan's sharp reduction in its provision for credit-related losses, which shrank to $3.22 billion in the third quarter from $8.1 billion a year earlier.
The decline is a "good omen for the industry," said Gerard Cassidy, an analyst at RBC Capital Markets. "We have been anticipating the earnings recovery in the banking system would be driven by credit improvements, and that is showing up in spades."
J.P. Morgan also set aside $1.3 billion of additional pretax litigation reserves, "including those for mortgage-related matters," according to the company, plus $1 billion to cover any forced repurchases of faulty mortgages from companies such as Fannie Mae and Freddie Mac.
"We think JPM is building a war chest against mortgage related litigation," Betsy Graseck, a banking analyst at Morgan Stanley, wrote in a note to clients.
J.P. Morgan said it has found examples of mortgage signers who didn't review underlying loan files, relying instead on the work of others. It also said affidavits filed as part of the foreclosure were not properly notarized.
"We are going file by file, case by case," said J.P. Morgan Chief Financial Officer Doug Braunstein. "If we made mistakes we fill fix them."
The bank's broadened review of foreclosure documents now includes 115,000 loan files.
Last month, J.P. Morgan temporarily suspended evictions in the 23 U.S. states where court approval is required for foreclosure. The 41-state review is expected to take several weeks.
Mr. Dimon, who also is J.P. Morgan's chairman, said Wednesday that the company hasn't used since at least 2008 a record-keeping system called the Mortgage Electronic Rating System, or MERS, to foreclose in the bank's name.
MERS serves as a stand-in for the owner and servicer of mortgages in foreclosures, but is facing mounting scrutiny amid the foreclosure mess. J.P. Morgan still uses MERS for mortgages originated by other banks or brokers.
A spokeswoman for MERS said that the bank "has chosen to foreclose in their own name, which is a common decision that is allowed under the structure of MERS."
Mr. Dimon said mortgage losses could linger for several quarters, expressing caution about the U.S. economy in a conference call even as he cited improvements in loan demand from small businesses and other borrowers.
"There continues to be a little more uncertainty out there about both the economy and what the political landscape entails," he said.
Mr. Dimon said he doesn't expect the foreclosure controversy to have an outsize impact on the economy. "I don't think the shooting-star risk will blow up," he said.