A Mopping-Up Quarter for JPMorgan, Other Mortgage Lenders

NEW YORK ( TheStreet) -- Some investors may have been shocked to see JPMorgan Chase ( JPM) report a third-quarter net loss Friday morning, but this is the perfect time for major banks to "clear the decks" in their mortgage businesses.

JPMorgan posted a third-quarter net loss of $380 million, or 17 cents a share, declining from earnings of $6.5 billion, or $1.60 a share in the second quarter, and $5.7 billion, or $1.40 a share, during the third quarter of 2012.

Analysts polled by Thomson Reuters had expected JPM to report third-quarter earnings of $4.7 billion, or $1.17 a share, which would have been a major decline in profits, factoring in three major regulatory settlements. These included an agreement to pay $410 million "in penalties and disgorgement to ratepayers," to settle Federal Energy Trading Commission charges of market manipulation, $920 million in fines to settle multiple probes of the 2012 "London Whale" trading fiasco and another $369 million in fines and customer refunds to settle regulatory charges of " illegal credit card practices."

JPMorgan has been negotiating with the Department of Justice, bank regulators and states' attorneys general to settle numerous criminal and civil investigations of its mortgage lending and sales activities. The settlement could end up as high as $11 billion, according to media reports, and the negotiations may have been held back by the ongoing partial shutdown of the federal government.

But the company has clearly signaled that a major settlement is coming, setting aside $9.15 billion for litigation expenses during the third quarter, which came to $7.20 billion, or $1.85 a share, after tax.

SunTrust ( STI) late on Thursday signaled what was coming for the major mortgage players by announcing over $1 billion in negative extraordinary third-quarter items.

The mortgage items announced by SunTrust included repurchase claim settlements with Fannie Mae ( FNMA) and Freddie Mac ( FNMA), which resulted in cash payments of roughly $268 million after credits for previously repurchased loans were deducted. The bank also was required to pay a $160 million fine to the Federal Reserve under the national mortgage settlement.

The largest item announced by SunTrust was a settlement of claims by the Federal Housing Administration resulting in a commitment to $500 million in "consumer relief" and a $468 million cash payment.

SunTrust on Thursday announced two other major extraordinary items, including a $96 million charge related to the sale of mortgage servicing rights and an after-tax benefit of $113 million, following a "taxable reorganization of certain subsidiaries during the third quarter."

Taken together, SunTrust said the multiple items would lower its third-quarter earnings after taxes by $179 million, or 33 cents a share. Before the announcement, the consensus among analysts polled by Thomson Reuters was for SunTrust to report third-quarter net income of $372 million, or 68 cents a share.

Unlike JPMorgan and SunTrust, Wells Fargo's ( WFC) third-quarter results weren't affected by mortgage settlements. Wells Fargo in September announced an agreement with Freddie Mac "to settle substantially all repurchase liabilities" for a cash payment of $780 million. But the bank said, "At June 30, 2013, Wells Fargo had fully accrued for the cost of the agreement.

Mortgage Revenue Stalls, as Expected

With the mortgage refinancing wave coming to an end as long-term interest rates rise, big banks have been quick to react, by cutting loan production staffs. Wells Fargo ( WFC) announced a total of 4,100 layoffs in its mortgage origination business during the third quarter. Bank of America ( BAC) laid off more than 2,000 members of its mortgage production staff during the third quarter.

The Mortgage Bankers Association last month estimated that third-quarter U.S. one-to-four family mortgage loan origination volume would decline 25% sequentially and 22% year-over-year, to $269 billion.

Atlantic Equities analyst Richard Staite in his third-quarter earnings preview for eight large-cap U.S. banks estimated a sequential drop in third-quarter mortgage revenue of 45% and a year-over-year decline of 55%.

While we won't see SunTrust's third-quarter revenue picture until the company reports on Oct. 18, the negative trend is already being seen.

Wells Fargo on Friday reported third-quarter mortgage banking income of $1.608 billion, declining from $2.802 billion the previous quarter and $2.807 billion a year earlier. The company's total mortgage loan originations declined to $80 billion in the third quarter from $112 billion in the second quarter.

Despite a 74% sequential decline in mortgage revenue, Wells Fargo still managed to post record net income of $5.6 billion, or 99 cents a share.

JPMorgan's third-quarter mortgage fees and related income totaled $841 million, declining from $1.823 billion in the second quarter and $2.377 billion a year earlier.

The early reaction to JPMorgan's "cleaning of the mortgage slate," was positive, with shares rising 1% in premarket trading to $53.10. Wells Fargo's shares were down 2.2% in the premarket to $40.51, and SunTrust's shares were flat in the premarket, at $33.35.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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