JPMorgan quietly climbs subprime ladder

Thu May 31, 2007 3:17pm EDT

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By Tim McLaughlin

NEW YORK May 31 (Reuters) - JPMorgan Chase & Co. (JPM.N) is downplaying its role in subprime lending even as spectacular flameouts in that sector have turned the Wall Street bank into one of the biggest originators of risky mortgages.

"We don't do much in the subprime business -- at all," JPMorgan Chief Executive Jamie Dimon told investors earlier this month at the company's annual meeting. "It will be a good business, by the way."

Indeed, the No. 3 U.S. bank, along with other Wall Street companies, has stepped into a void triggered by a meltdown in the market for lending money to homebuyers with weak credit.

JPMorgan's first-quarter subprime mortgage originations, through Chase Home Finance, jumped 11 percent to $3.02 billion, according to Inside Mortgage Finance. The bank was No. 11 in a ranking that included No. 7 New Century Financial Corp. NEWCQ.PK, which now is being liquidated in bankruptcy.

Not much subprime business at JPMorgan translates into a subprime mortgage portfolio that stood at $13.2 billion at the end of last year, or about 3.6 percent of the company's $367 billion consumer loan portfolio. JPMorgan sold most of its 2006 subprime production, offloading risk. JPMorgan does not specify how much subprime lending contributes to its bottom line, but the earnings potential is there. In March, Charles Scharf, head of JPMorgan's retail division, said home equity loans and subprime mortgages have the potential to contribute a total of $800 million in annual net income when working with the company's investment bank.

Profits increase when JPMorgan's investment bank packages pools of loans into securities and sells them to investors. That's one key reason why Wall Street banks have stepped up their subprime game.

CitiMortgage, a unit of Citigroup (C.N), originated $8.1 billion in subprime mortgages during the first quarter, a 29 percent year-over-year gain that catapulted the bank to the top spot among U.S. subprime lenders.

While CitiMortgage, JPMorgan and Merrill Lynch & Co.'s subprime unit, First Franklin Financial, showed gains, industrywide subprime lending plummeted 32 percent to $95 billon in the first quarter, Inside Mortgage Finance said.

Countrywide Financial Corp. CFC.N and HSBC Finance, the U.S. unit of London's HSBC Holdings Plc (HSBA.L), have reined in their subprime lending, but remain the No. 2 and No. 3 lenders in the sector, respectively.

Merrill Lynch Chief Executive Stanley O'Neal recently told Bernstein Research analyst Brad Hintz that Merrill's $1.3 billion acquisition of First Franklin will allow the company to boost its market share for mortgage-backed securities.

"Mr. O'Neal admitted that it's hard to make money in mortgages now," Hintz said in a research note. "But he pointed out that 25 competitors have left the market or declared bankruptcy and (First Franklin) leaves Merrill Lynch with large origination capabilities that will prove its value as the market adjusts to new issuance standards and economics of the mortgage business."

((Reporting by Tim McLaughlin, editing by Richard Chang; Reuters messaging: tim.mclaughlin.reuters.com@reuters.net; +1 646 223 6033)) Keywords: USA SUBPRIME WALLSTREET

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