JP Morgan Chase, the fifth largest mortgage lender in the US, has released its Q2 2022 earnings report, and the news isn’t great. The bank saw a double digit decline in originations, margins compression, and revenues.
Origination volume totaled $21.9 billion from April to June, a decline of 11% compared to the previous quarter, and a 45% decrease compared to Q2 2021.
The retail channel, which typically has higher margins, saw a particularly steep decline, originating $11 billion in Q2 2022, down 27% quarter-over-quarter and 52% year-over-year.
The correspondent channel saw a decrease of 36% year-over-year, but an increase of 14% compared to the previous quarter.
JP Morgan’s home lending net revenue reached $1 billion in Q2 2022, down from $1.3 billion in the same quarter in 2021 and $1.2 billion in Q1 2022.
The bank’s servicing rights increased to $7.4 billion in Q2 2022 from $7.2 billion in the previous quarter and $4.5 billion in Q2 2021. Net mortgage servicing revenues declined 7% from $245 million in Q1 2022 to $227 million in Q2 2022.
The decline in JP Morgan’s mortgage business can be attributed to higher mortgage rates as a result of the Federal Reserve’s tightening monetary policy. The bank has been preparing for a potential recession in the US by being conservative in its servicing portfolio as the economy slows down.
However, JP Morgan CEO Jamie Dimon believes that the US economy is still growing, citing a healthy job market and consumer spending. Geopolitical tensions, high inflation, and ongoing uncertainty about how high rates will go could all have negative consequences on the global economy.
Dimon added that consumers are in good shape and will enter a potential recession with less leverage and in better shape than they did in 2021.
Analysts at Keefe, Bruyette & Woods (KBW) said that the results were consistent with expectations for weak mortgage banking earnings, but the smaller-than-expected positive servicing mark could be more company specific.
The KBW report stated that gains on sale margins decreased 17 basis points quarter-over-quarter, which was slightly worse than expected. However, about two-thirds of this appeared to be driven by the shift in channel mix (lower retail/ higher correspondent).
On the mortgage servicing portfolio, the KBW analysts said that given the move-in rates during the quarter, the MSR mark came in below expectations. The report stated that the MSR valuation increased by just 2% quarter-over-quarter, which was smaller than expected.
This could potentially reflect some conservatism on expected servicing costs in case delinquencies pick up in a slowing economy.
