JPMorgan Chase CEO Jamie Dimon told shareholders this week that the U.S. housing finance system is “desperately” in need of reform, and claimed that the housing market’s status quo of the last several years left at least $1 trillion in mortgages on the table.
Dimon made those claims in his yearly letter to shareholders, where he comments on both the bank and the country’s overall financial picture.
Dimon is no stranger to using these letters to call for sweeping reforms. Two years ago, Dimon said that if certain mortgage lending and servicing reforms were put in place, there could be an increase of $300 billion in originations per year. The year before that, Dimon claimed that originating mortgages was basically a losing proposition for the bank, but said that Chase continued to lend for the good of its customers.
Dimon reiterates his call for mortgage reform in the 2019 version of his shareholder letter, and claims that a “conservative” analysis of the mortgage market shows that the current lending environment cost at least $1 trillion in mortgages over a five-year period that could have been originated if reforms had been enacted.
“The country desperately needs mortgage reform,” Dimon wrote.
“It would add to America’s economic growth. Reducing onerous and unnecessary origination and servicing requirements (there are 3,000 federal and state requirements today) and opening up the securitization markets for safe loans would dramatically improve the cost and availability of mortgages to consumers – particularly the young, the self-employed and those with prior defaults,” Dimon continued.
“And these would not be subprime mortgages but mortgages that we should be making,” Dimon added. “By taking this step, our economists believe that homeownership and economic growth would increase by up to 0.2% a year.”
Homeownership has been on the rest in recent years, but it’s still trailing behind historic levels. And according to Dimon, that could increase even more with mortgage market reform.
“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy,” Dimon said.
“Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform,” Dimon continued.
“This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business. That business, in particular, highlights one of the flaws of our complicated capital allocation regime,” Dimon said. “The best way to risk manage a bank is to use risk weights that are actually based on risk. However, since most banks are also constrained by standardized capital (a capital measure that does not risk-adjust for the lower risk of having a properly underwritten prime mortgage), owning mortgages becomes hugely unprofitable.”
As Dimon writes, the cost of originating and holding loans has increased significantly since the housing crisis, making it difficult for some lenders to stay in the mortgage business.
Even Chase is not immune as Dimon said that the company is currently reconsidering its place in the mortgage market.
“Because of these significant issues, we are intensely reviewing our role in originating, servicing and holding mortgages,” Dimon said. “The odds are increasing that we will need to materially change our mortgage strategy going forward.”
To read Dimon’s letter in full, click here.
