Tax cuts will lead to mortgage boom, right? Wrong, says Dimon

Given the boost coming to take-home pay and other fruits of the new tax law, it stands to reason that banks have an opportunity to loosen the rigid underwriting standards they imposed after the crisis, which allowed only consumers with pristine credit to get a mortgage.

But when asked about the prospect of loosening underwriting standards Friday, JPMorgan Chase CEO Jamie Dimon said it will take much more than a tax cut — and any resultant growth — to entice banks to give mortgages to first-time borrowers, people with prior defaults and others who have been shut out of the market.

During a conference call with analysts, Dimon reiterated his call for further changes to mortgage rules, saying that fixes to problems in FHA and other regulations could unleash a wave of growth in the market.

“It’s not going back to subprime, it’s just opening up the credit box and reducing the cost of the average mortgage,” Dimon said.

Dimon said that the largest U.S. bank by assets has not softened its underwriting standards, even though it expects higher personal incomes and broader economic growth thanks to the tax cuts. Instead, he said, it will take policy changes at the federal level to encourage banks to make loans to borrowers with somewhat spotty credit files.

“That’s going to take the agencies working together to set new rules and guidelines,” Dimon said. “If that happens, that can actually be really good for growth in America.”

Dimon has previously advocated for changes to a host of mortgage-related rules. In his most recent annual letter, for instance, he expressed support for overhauling Federal Housing Administration lending regulations. Many banks have backed away from FHA lending since the mortgage crisis, out of fear that they could be sued by the federal government for violating the False Claims Act if they fail to properly follow underwriting guidelines.

Policymakers should make it clear that the False Claims Act should only penalize “intentional fraud” rather than unintentional errors, Dimon wrote in his letter.

Dimon also called on policymakers to simplify standards for mortgage servicing, which, he said, is made unnecessarily costly by a patchwork of state and federal requirements.

During the call Friday, which was dominated by chatter about taxes, Dimon’s comments underscored an overlooked point — that JPMorgan has rapidly grown its residential loan portfolio over the past year.

Within the company’s consumer bank, residential mortgages were the company’s fastest-growing category of loans at yearend, rising 9% from a year earlier, to $197 billion. By comparison its closely watched credit card book rose by 5%, while auto loan balances were mostly flat, increasing just 1%. To be sure, home equity lending fell 15% to $42.8 billion.

In the years following the crisis, JPMorgan like many other big banks has largely targeted the jumbo loan market, which mostly includes loans of greater than $453,100.

The company has also made mortgages a focus of its cross-selling efforts, particularly targeted at well-heeled customers of its popular Sapphire Reserve credit card. The company last year, for instance, offered a bonus to card users who also took out a mortgage.

The promotion got a “significant uptake” from Sapphire Reserve customers, said Gordon Smith, CEO of JPMorgan’s consumer and community bank, at an industry conference this summer.

One of Dimon's peers, Wells Fargo CEO Tim Sloan, also downplayed any notion of loosening credit standards. Sloan made it clear during his company’s quarterly call Friday that the bank has no plans to modify its standards in the immediate future.

“We don’t anticipate making any changes to our underwriting as it relates to mortgage,” Sloan said. “We kind of look at those every day and want to be competitive from a market standpoint, but we’re also going to take a long-term view and not get too aggressive at any one point in time.”

During the fourth quarter, residential mortgage originations at the San Francisco company fell 26% from a year earlier to $53 billion.

However, first mortgages on its books increased 3% from a year earlier to $284.1 billion at yearend. Sloan said he expects that trend to hold steady in the coming year.

"We believe we'll continue to grow mortgage loans this year," Sloan said.