Colin Barr

Following the money in banking, economics, and Washington

Will JPMorgan face facts on foreclosures?

October 12, 2010: 12:28 PM ET

Jamie Dimon manhandled the market meltdown. Can he flout the foreclosure fiasco too?

We will get an answer Wednesday, when JPMorgan Chase (JPM) is due to post third-quarter earnings. Wall Street expects the bank to earn 90 cents a share, up from 82 cents a year ago, but the bank's profits are far from the biggest issue right now for investors.

Where the action is, unfortunately

Legal challenges have forced Chase and other big banks, notably Bank of America (BAC) and government-owned Ally, to halt foreclosures and related sales while they investigate apparent improprieties in their handling of homeownership documents.

At the very least, these delays stand to crimp profits in the banks' lucrative mortgage servicing business at a time when regulatory crackdowns are already pressuring earnings. But the banks have offered little guidance on how much of a hit they might expect. What's more, skeptics say their legal exposure could be quite large.

The result is yet another cloud of uncertainty hanging over the banks at a time when investors already have been backing away from the biggest players.

"Banks need to either fess up and announce a reserve build or state they are clean," Morgan Stanley analyst Betsy Graseck wrote in a note to clients Tuesday. "Our challenge is that we do not have basis for assessing fraudulent foreclosure probabilities."

This is where Dimon has his chance. He distinguished himself in the months leading up to the 2007 market meltdown by, unlike his peers at Citi and elsewhere, at least admitting that the industry's damn-the-torpedoes approach to mortgage underwriting could lead to some unexpectedly large losses.

He said in JPMorgan's 2006 annual report that credit losses could rise by as much as $5 billion over time, thanks in part to subprime mortgage missteps.

"It's important to share these numbers with you, not to worry you, but to be as transparent as possible about the potential impact of these negative scenarios and to let you know how we are preparing for them," he wrote.

Say it again, Jamie

JPMorgan didn't immediately respond to a request for comment, but it's clear the stakes for the bank are substantial. JPMorgan has the most housing loans in foreclosure, SNL reports, with $19.5 billion worth in foreclosure proceedings.

That's 7.5% of the bank's home loans – well above the comparable rates at BofA and Wells Fargo (WFC), the other big mortgage banks. JPMorgan also services $55 billion worth of other banks' mortgages, making it the No. 2 servicer after BofA.

To be sure, JPMorgan has had a reputation as one of the more responsible players in the mortgage industry, not that that's necessarily saying much.

The bank "is not nearly in as bad shape as Bank of America and Wells Fargo in terms of legacy issues arising from securitizations," says Chris Whalen of Institutional Risk Analytics. Even so, he suggests analysts remain more smitten with Dimon & Co. than is really justified. Nothing new there.

"We will be interested in its color on the direction the industry might move with respect to the foreclosure process," Barclays analyst Jason Goldberg wrote in a note to clients last week.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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