NEW YORK: In September 2008, JPMorgan Chase & Co executives sifted through the rubble of Washington Mutual, the failed home loan bank that they had just won in a US government auction.
They found something unexpectedly good: about US$30 billion of mortgages on apartment buildings, which earned strong returns whether the economy was performing well or not.
“It was an unexpected bonus,” JPMorgan chief executive Jamie Dimon told Reuters in an interview, adding that the apartment lending business is the single most valuable asset that JPMorgan acquired in the auction.
Washington Mutual’s apartment lending business was the biggest of its kind in the United States and Dimon has made it even bigger.
JPMorgan now holds some 20 per cent of the US bank loans on apartment buildings.
Before the crisis, the bank ranked closer to 20th. JPMorgan now has US$52 billion of these loans outstanding, giving it a stronghold in a market that is increasingly important in the United States after the housing crisis brought down the homeownership rate.
Within JPMorgan, apartment lending is a relatively small business, accounting for less than 2 per cent of its US$2.6 trillion of assets.
But the unit is seen as a model for how JPMorgan wants to run its lending business overall: make smart lending decisions in good times, like now, so that it can be strong enough to buy distressed assets on the cheap during bad times.
That’s how JPMorgan’s apartment lending business grew so much during the crisis: the bank bought assets from Washington Mutual and Citigroup Inc at low prices, which are generating solid income now.
The bank is plowing income from crisis assets back into its business, to make it more efficient and better prepare it for the next downturn.
For example, JPMorgan is building systems that will allow it to approve loans in 15 to 20 days, half its current time, which is already fast by industry standards.
The bank believes that when it can make loans faster than rivals, it will win more business without having to lower its credit standards.
Lending fast is critical for the niche that JPMorgan focuses on: small apartment building owners, who are served by fewer lenders than big building owners, and will therefore generally pay banks slightly higher rates-around 3.625 per cent instead of the 3.5 per cent charged for loans of more than US$3 million.
The bank’s apartment business could be tested in at least two ways in coming years.
As the Federal Reserve raises interest rates, the value of apartment buildings, which are bond-like assets, could decline, making it harder for some landlords to refinance their loans. Also, in some metro areas developers have built many new apartment buildings, which could cut into the value of the collateral backing JPMorgan’s loans. But the bank is working to reduce its risk by taking steps like avoiding markets where building is happening at a torrid pace.
JPMorgan’s business is headed by former Washington Mutual executive Al Brooks, 58.
He had been with JPMorgan for barely a year, and the economy was still fragile, when Dimon asked him what apartment lending assets he wanted to buy.
Brooks said that he had heard Citigroup wanted to sell its apartment loans as part of its plan to shrink the company after having been bailed out by the government.
Within days, JPMorgan was negotiating to buy US$3.5 billion of loans from Citi, which was willing to let him and his team choose loans one-by-one, he recalled in an interview with Reuters. — Reuters