(Rewrites throughout, adds outside comment, detail on foreclosures)
By David Henry
NEW YORK, July 15 (Reuters) - JPMorgan Chase & Co, the second-largest U.S. mortgage lender, is backing away from making home loans to less creditworthy borrowers after losing faith in its ability to recover much money from foreclosing on homes, even with government guarantees.
The shift reflects a change in the way JPMorgan runs its mortgage business: while it used to regard collateral and U.S. government lending programs as key backstops to most of its loans, it now pays closer attention to the credit quality of borrowers. The bank wants to reduce the chances of having to foreclose on a loan, because it's bad business.
"The cost to take a customer through the foreclosure process is just astronomical now," Kevin Watters, chief executive of JPMorgan Chase's residential mortgage banking business in New York, told Reuters in an interview.
In addition to federal standards, states, and in some cases local governments, have written their own rules making it more expensive for banks to recover loan losses, he said. According to foreclosure data firm RealtyTrac, it took an average of 120 days to foreclose on a home at the beginning of 2007, just as the housing bubble was starting to burst. In the first quarter of 2014, it took 572 days, or more than 1.5 years.
Lenders have generally been paying more attention to borrowers' credit quality since the financial crisis, but JPMorgan is going a step further in its reluctance to rely on government loan guarantees and insurance.
If other lenders choose the same path as JPMorgan, it could become more difficult for people to secure financing to buy homes, even though government programs are intended to help credit flow to these borrowers, said Christopher Mayer, a professor of real estate finance at Columbia University.
"This could reduce the number of first-time buyers and slow the speed with which people who lost their homes during the crisis can become homeowners again," said Mayer.
For now, JPMorgan is taking a different path from smaller competitors, many of which have lowered their underwriting standards. Some lenders, particularly those that aren't banks, are increasingly willing to make subprime loans.
Over the last 18 months lenders have been making loans to borrowers with lower and lower credit scores on average, according to mortgage data provider Ellie Mae, although the mean is still well within the "prime" category.
As JPMorgan pulls back from mortgage lending, non-banks are ramping up. The third biggest mortgage lender in the United States in the first quarter was Detroit's Quicken Loans, according to industry newsletter Inside Mortgage Finance, after Wells Fargo & Co and JPMorgan. Quicken is a bigger mortgage lender now than Citigroup Inc or Bank of America Corp.
The mortgage market is shrinking as rising rates cut into refinancing demand and home sales growth is spotty. But JPMorgan is shrinking faster than many of its rivals: its market share fell to 8.1 percent in the first quarter of 2014 from 11.1 percent in the same quarter a year earlier, according to Inside Mortgage Finance.
On Tuesday, the bank posted a $74 million loss from making mortgages in the second quarter, compared with $566 million of income in the same quarter last year. The bank has said it expects to lose money making home loans for the full year.
Wells Fargo does not break out its mortgage figures in exactly the same way, but its mortgage banking revenue fell 38.5 percent in the second quarter from the same quarter last year to $1.72 billion.
BANK EXECS FEEL MUGGED
JPMorgan may take until 2015 to fully formulate its new mortgage strategy, but one area it is pulling back from already is loans made under the Federal Housing Administration program, which allows first-time homeowners to borrow as much as 96.5 percent of the purchase price of their house.
The government guarantees these loans against default, but the FHA has clashed with JPMorgan and other big banks over whether some of the loans they made qualified for the insurance.
Chief Executive Officer Jamie Dimon said on a conference call on Tuesday that he was frustrated when the bank settled with the FHA in February for $614 million for getting government insurance payments on loans that allegedly were not eligible for coverage. [ID: nL2N0L928N] An FHA spokesman declined to comment on Dimon's remarks.
Dimon added that the bank's experience with FHA loans was so bad that "the real question to me is should we be in the FHA business at all and we are still struggling with that."
In November, the bank settled with the Department of Justice, the regulator for Fannie Mae and Freddie Mac and others for $13 billion for mortgage-related matters. [ID: nL2N0J40XA]
In private, the JPMorgan CEO has complained to colleagues about the unfairness of the bank's mortgage settlements. Executives at many of the biggest banks have griped that the FHA, Fannie Mae, and Freddie Mac have punished lenders for minor problems with documents to avoid having to pay guarantees and insurance they had agreed to provide.
Banks continually gripe about legal settlements and new regulation, but JPMorgan's intent to change its business is clear from market share data. The bank's share of FHA loans in April was just 1.7 percent, compared with 3.1 percent for all of 2013, according to Inside Mortgage Finance.
In May, FHA officials said they were taking new steps to make their rules clear so that lenders will finance borrowers without fear of unanticipated consequences. And, in June they proposed new rules to do just that.
Dimon, in the conference call, held out hope that the FHA will make adjustments that will allow the bank to make credit more available to marginal borrowers without the risk of severe penalties.
One area where the bank isn't shrinking is "jumbo loans," mortgages that are so big that government agencies will not guarantee or insure them. These borrowers tend to be wealthier and have more assets to pay off their loans. JPMorgan has been under-cutting competitors on prices for the loans and winning a bigger share of that business, company executives say. (Reporting by David Henry, editing by Dan Wilchins and John Pickering)