JPMorgan Works to Shed Consumer Loans

Charles Scharf, head of retail banking at JPMorgan Chase, sees the company's consumer lending portfolio declining by as much as 15% over the next year.
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JPMorgan Chase

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said its consumer lending portfolio could decline by nearly $50 billion over the next year as the financial titan works to unwind troubled mortgages and home equity loans on its books.

Speaking at the BancAnalysts Association of Boston conference, JPMorgan's head of retail Charlie Scharf Thursday projected the $329.3 billion portfolio would diminish by another 10% or 15% in 2010 as the company works to jettison bad loans from its acquisition of

Washington Mutual

and troubled brokered home equity loans in the legacy Chase portfolio. At the high end of that estimate, the company would be cutting away $49.4 billion in loans.

Scharf spent considerable time in his presentation discussing the institution's troubled mortgages and provided detail on the company's foreclosures and loss mitigation/loan modification efforts.

He specifically pointed out that there has been an improvement in sales of real estate-owned properties.

Real-estate owned properties in JPMorgan's servicing portfolio have been declining "fairly consistently," Scharf said. "We're all getting better at the process of selling these properties efficiently," but an improvement in the market is also helping the company clear the properties.

"It's very, very uneven, but in places like California, Arizona and Nevada, which had been a big part of the decline, you do start to see some flattening which is makes us feel better ... but we know there is more pain to come elsewhere in the country," Scharf says.

Florida is one state where the company continues to see erosion in the housing market, Scharf says.

Unlike states such as California, contract prices in Florida are not improving and new foreclosures continue to rise, despite high sales volume in the state. "There are people that are buying, but at very discounted values," Scharf says. There is "still a fair amount of investor buying getting done in Florida."

"We continue to worry about the Florida market," he adds. Over the long term, "it's a great place to do business, but short term we're going to see more stress out of the marketplace."

Scharf estimates that the number of loans where the company will be successful in loss mitigation efforts for Florida will be much lower than in other states because of a high amount of non-owner occupied properties.

On the loan modification front, JPMorgan Chase has completed roughly 280,000 trial loan modifications through Oct. 24, with another 98,000 in the process. The company is doing the loan modifications under the government's Home Affordable Modification Program as well as its own program, initiated in late October 2008, shortly before the government came out with its initiative.

Other big banks including


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Bank of America

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through its purchase of Countrywide and

Wells Fargo

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through its purchase of Wachovia are also working to extend


to troubled borrowers.

Performance is an important focus. Scharf says most of the modifications made under these programs have been for decreases in payments, and that adjustments were made for the most troubled borrowers first. He added that 78% of the borrowers getting modifications have already made at least one payment on the new loan.

Banks, including JPMorgan, are having a hard time getting borrowers to provide the full documentation needed for these modifications, which extends and potentially hampers the process of making permanent changes. To date, only 26% of JPMorgan borrowers with trial loan modifications that have made three or more payments andprovided the full documentation.

"Next quarter will be interesting because the three-month

trial period is up," Scharf said.

--Written by Laurie Kulikowski in New York.