JPMorgan's retail focus led to better than expected mortgage results

JPMorgan Chase was discerning in originating mortgages in the first quarter, a contributing factor to a larger increase in the gain on sale margin than predicted, a Keefe, Bruyette & Woods report said.

However, this is one instance in which the bank isn’t expected to be an indicator for other lenders’ first quarter results in the coming weeks. "We see limited GOS read-through to the broader mortgage market as nonbanks are unlikely to be as selective in terms of reducing mortgage volume," KBW analyst Bose George said in a report. "We continue to expect sequentially lower GOS margins in the first quarter for the industry."

Originations at JPMorgan Chase were down by 42% compared with the fourth quarter of 2021, which was far higher than the 20% to 25% drop that KBW is expecting for the entire industry.

But gain on sale margins totaled 85 basis points, an 8 bp increase on a quarter-to-quarter basis, which was slightly better than KBW expected. That boost is attributed to JPMorgan sourcing a higher share of loans through the higher-margin retail channel, 61% for the first quarter from 53% in the fourth quarter. Its remaining production was generated through the correspondent channel.

JPMorgan originated $24.7 billion in the first quarter, with $15.1 billion from retail and $9.6 billion purchased in the correspondent channel. This compares with $42.2 billion in the fourth quarter — $22.4 billion retail; $19.8 billion correspondent — and $39.3 billion in last year's first quarter, with $23 billion produced through retail and $16.3 billion acquired from correspondents.

Home lending net revenue at JPMorgan was $1.17 billion in the first quarter, compared with $1.08 billion in the fourth quarter and $1.49 billion one year ago.
Mortgage banking income in the fourth quarter totaled $456 million, including $211 million in production revenue and $245 million of net servicing revenue.

This represents a shift from prior periods. In three of the prior four quarters, JPMorgan lost money on servicing. Its fourth quarter mortgage income of $312 million consisted of a $327 million origination profit and a $15 million servicing loss. First quarter 2021 mortgage banking earnings of $703 million included $757 million of production revenue offset by a $54 billion loss from the servicing segment.

Those watching nonbanks can look at JPMorgan's servicing numbers as good news. "The servicing mark is a modestly positive read-through for mortgage servicers such as Mr. Cooper and New Residential," George said.

JPMorgan's mortgage servicing rights valuation increased by 20% to 127 bps from the end of the fourth quarter. It was 106 bps in Q4 2021, and for the first quarter of last year, it was 102 bps.

"We think that MSR values have increased further quarter-to-date given that rates have continued to move higher," George said.