In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Wednesday, January 16, 2008

JP Morgan: Home Equity Delinquencies Higher than Expected "even at the peak of the cycle"

by Calculated Risk on 1/16/2008 09:52:00 AM

Quote of the day:

“For all consumer credit and I think we've pointed out consistently that we see in auto, home equity, subprime, credit card, that where home prices are down, delinquencies, charge-offs are going up, and so we've kind of been preparing for that, thinking about that and trying to build that into some of our models and that's what you see in home equity and I hope we get near the end of this but this was certainly higher than we would expect it even at the peak of a cycle.”
CEO Jamie Dimon, J.P. Morgan Chase, Jan 16, 2008
And on credit cards:
“So remember, credit card was always kind of abnormally low , so part of what you're seeing we think is the catch up to getting back to a more normal, forget everything else. The second effect is that in HPA's, where prices are down, think of California, Arizona, Miami, Michigan, Ohio, we have seen the credit card delinquency losses simply going up, so where we have real visibility, we know it's going to hit 4.5% or thereabout in the first and Second Quarter, we're obviously a little less certainly about the Second Quarter. What I'm saying is I believe that home prices are worse than people think. That's my own personal belief. Just looking at numbers and thinking at lags and what goes into those things and therefore, if you kind of roll that through, while there's nothing in the current data that shows it, I think that more likely than not it will be 5% [delinquency] by the end of the year and that's barring a real recession. Remember, in the credit card and the consumer business, on top of all of this other stuff we talk about which is normally driven credit losses, real cyclical credit losses is unemployment. I think that will still be a factor if you see unemployment going up on top of this other stuff.”
With a recession, and rising unemployment, it could really get ugly.

Added (hat tip Brian):
James Dimon:
This is a lesson that's been learned over and over about broker originations, they perform much worse than our own originations, and if you separate home equity into we call it kind of good bank, bad bank, and broker so I would say it's less than 20%, but a lot of the losses are coming from that 20%, which is high LTV, broker originated businesses. High LTV business is also bad in its own.

And the 20% you referred to a minute ago in round numbers is the sort of specifically high LTV and originated away [by brokers] is that right?

James Dimon:
It's been very consistent In both our own originated and broker originated, high LTV, stated income is bad. It is three times worse in broker than it is in our own.

The broker model is broken.