banks

JPMorgan loses money every time it makes a mortgage

April 11, 2014: 3:37 PM ET

That's bad news for the housing market and the economy in general.

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FORTUNE -- If you are wondering why you can't get a mortgage, here's an answer: Every time JPMorgan Chase makes a home loan, it loses money, $1,500 on average. That might not make JPMorgan want to make so many loans.

That helps explain why banks are lending so little, and why the housing recovery, which seemed to be zooming along just a few months ago, has begun to falter. It also may say something about the sluggish economic recovery.

On Friday, JPMorgan (JPM) reported its first-quarter earnings. They were less impressive than analysts were expecting, in part because loan growth at the nation's largest bank in the country has evaporated. JPMorgan had $730 billion in loans a year ago. It has the same now. Deposits are still rolling in. Typically, a bank makes money lending out the money it takes in from depositors and pocketing the difference. But JPMorgan is now lending out just 57% of its deposits. It used to be more like 80% a few years ago.

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Signing up borrowers was never the most profitable part of the mortgage business. The bigger profits came from collecting the interest on the loans, or selling those loans off to others. But it was never a loss leader, either.

A year ago, for instance, JPMorgan made about $750 per loan. The year before that, it booked $3,300 of profits for every new loan.

But then, about a year ago, interest rates began to rise for the first time since the financial crisis. It wasn't much, around one percentage point, but it was enough to crater one of the few businesses for the banks that had come roaring back. And the housing market remains fragile. All of a sudden, all those people who were rushing into refinance their mortgages every time rates dropped stopped coming in.

JPMorgan funded $53 billion in mortgage loans in the first three months of 2013. That shrank to $17 billion in the first three months of this year. And JPMorgan is based on being big. The result is that you don't just make less when you make fewer loans. You make nothing. A year ago, JPMorgan earned $500 million in the first quarter from originating home loans. In the first three months of 2014, it lost $200 million.

That might not be all that bad if JPMorgan were still making good money on the other parts of the mortgage process, like collecting interest or selling off loans. But it's not. Interest rates are still near lows. What's more, the rise in interest rates has squeezed the difference between what banks can charge mortgage borrowers and the interest they have to promise the purchasers of those loans. That difference a year or so ago accounted for a huge source of profits.

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Put it all together and JPMorgan made just $114 million in income from its entire mortgage operations in the first quarter. That was down from nearly $700 million a year ago and $1.1 billion the quarter after that. But bankers like to talk about their businesses not in total profits but the returns they generate. Three quarters ago, JPMorgan's mortgage business had a return on investment of 23%. Last quarter, it was 3%. JPMorgan could have almost done just as well by putting all of its money in a 10-year Treasury bond and calling it a day.

And it's not just the mortgage business. Over the past few years, consumers and businesses -- some not so great -- have been able to secure loans at historically low interest rates. Expectations adjust. Now, interest rates are rising, and borrowers don't want to pay higher prices. How long will it be before borrowers adjust? If you have just refinanced your 30-year mortgage, it might be a while.

If you want to know what higher interest rates might mean for the banks, take a look at JPMorgan's mortgage business. It's not good.

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