A year ago, JPMorgan Chase had just set a U.S. banking profit record, but the leaders of one of its most quintessential businesses were far from riding high.
"Early 2019 was a depressing time for a lot of us," Robert Segnini, head of retail and consumer direct mortgage underwriting, told employees at an internal town hall this month. "There was no real path forward, and we didn't see a way to make money into 2020."
The company had hemorrhaged about $850 million in 2018 originating home loans through its retail channel, Segnini said, according to people who heard the remarks. Last year, cost cuts and a drop in interest rates helped spur a recovery, allowing executives to privately predict that 2020 would finally mark a comeback.
"We could go from, over a two-year period, losing almost a billion, to breaking even, to kind of making $300-plus million," Segnini said. "The economy is working for us in 2020. How do we capitalize on that and have a blockbuster year?"
With interest rates and unemployment at rock-bottom lows and home values rising, the part of JPMorgan's retail business that sells home loans to consumers — either when they walk into a branch, or when they call in or apply online — made money last month, marking the first profitable January in five years, the people said, asking not to be identified discussing internal numbers.
The bank's home-lending business sits within the consumer bank and is made up of three parts: mortgage originations, mortgage servicing and portfolios of real estate loans kept on the bank's books. As a whole, the home-lending unit has been profitable every year for at least five years, according to company spokeswoman Trish Wexler, who declined to discuss origination earnings. JPMorgan — which is hosting its annual investor day Tuesday — reports revenue for the business, but not profits and losses.
'Feel great'
"Our strategy has been clear over the last five years — to build a high-quality, lower-risk business for this really important product for our customers," Wexler said in an email. "We feel great about our progress and are exactly where we want to be now. We've built a solid foundation with great digital experiences that we're deploying at scale. We have all the elements in place now to make us optimistic about 2020 and beyond."
Still, the past weakness in origination reveals the extent of the bank's struggles in a business that has repeatedly drawn the ire of Chief Executive Jamie Dimon. Clumsy regulation has made it harder for banks to lend and costlier for aspiring homebuyers hoping to get into the market, Dimon has said in speeches and letters to shareholders. JPMorgan's economists estimated that a "properly designed" lending industry could have generated more than $1 trillion in additional loans, Dimon said last year.
"Because of these significant issues, we are intensely reviewing our role in originating, servicing and holding mortgages," he wrote in his letter to shareholders last April. "The odds are increasing that we will need to materially change our mortgage strategy going forward."
More business
Despite the increasing complexity and cost, banks have historically justified staying in home lending, saying it brings in other business.
Signs of a turnaround have come as a surprise to people internally, who, as late as last year, expected origination to remain unprofitable into 2020. At last year's investor day, Mike Weinbach, the unit's CEO at the time, said a smaller origination market and increased digitization had put pressure on margins and raised the cost of originating loans.
"In light of this challenging environment, we're being intentional in our positioning across the business," said Weinbach, who'd run the business since 2016 and left last month for a job at competitor Wells Fargo He was replaced by Mark O'Donovan.
A year later, executives are basing their expectations on cost cuts and optimism that the lowest mortgage rates in three years will spur more homeowners to refinance, a trend that buoyed earnings in last year's second half, the people said. Banks' origination businesses tend to benefit when rates go down, while their servicing operations do better when rates go up. The two are seen as hedges against each other.
Volume rises
Marianne Lake, who's been overseeing all of consumer lending since May, has been imparting a simple strategy to middle managers: cut costs and sell more home loans to customers who already have a primary banking relationship with the bank, according to people familiar with the strategy.
JPMorgan originated $51 billion of home loans through its retail channel last year, an increase of 33% and the first time since 2016 volume has risen. Including mortgages through correspondent channels, in which the bank buys loans from other lenders, the total rose 32% to $105.2 billion.
Still, its market share of originations is anemic for the nation's biggest bank, amounting to just 5% in the past quarter, according to data compiled by Bloomberg. That compares with a peak of 25% in 2006.
JPMorgan was hardly alone in pulling back. Across the banking industry, complex regulations and tougher capital rules after the financial crisis put the squeeze on what was once a major profit center. As the biggest banks scaled down operations and pulled back from riskier corners of the market in response to regulatory scrutiny, nonbank lenders like Quicken Loans Inc. and PennyMac Financial Services Inc. elbowed their way in.
Losing money
The big banks have struggled to shift costs amid a decline in volumes, and don't originate as many mortgages through government programs, which tend to be more lucrative, said Jim Cameron, senior partner at Stratmor Group, a mortgage industry advisory firm.
"It's like driving a supertanker — large banks have significant overhead and they're not as nimble as smaller nonbank lenders," Cameron said.
By 2018, as rates were rising, the cost to originate a mortgage for the average large bank through retail channels had risen to a record $13,628 per loan, figures from Stratmor show. Big banks lost $4,803 for every mortgage they originated and sold directly to consumers that year, while nonbanks generated a profit of $376 per loan.
A lack of marketing focus, inability to quickly pivot when the market changes and ineffective technology spending have all resulted in big banks not doing as well as they should, according to Stratmor.
Emulating Quicken
Quicken has charged past almost every U.S. mortgage provider with the help of flashier technology, like its online Rocket Mortgage platform.
JPMorgan has been looking to emulate Quicken's efficiency and digital expertise, according to people familiar with internal thinking. The bank has been using technology to automate and digitize its home-loan business to cut costs and appeal to more customers. In the second half of 2018, it rolled out a digital platform for mortgages aimed at reducing paperwork and expediting the loan process.
Next, the bank wants to use everything it knows about its customers' income, assets and spending habits to be able to target them with personalized, pre-approved offers for home loans. JPMorgan also has been outsourcing some processing jobs to lower-cost locations outside the U.S., the people said, with the goal of ensuring the bank can handle an uptick in origination volumes while keeping costs low.
