We recently learned that JPMorgan Chase (NYSE:JPM) has made a new investment in a private label mortgage exchange, the latest in a series of investment activity by the banking giant. In this Fool Live video clip, recorded on June 29, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss the investment and why JPMorgan Chase might be so interested in it.
Jason Moser: JPMorgan in the news recently, Matt, and it is because of investments they're making in what looks like is described a private-label mortgage exchange. This is something where we saw these types of mortgages, ultimately mortgages that are not being backed by Fannie and Freddie. This is something we saw, I think a little bit more on the 2008, 9, 10 range. Of course, the financial crisis that occurred then, which was very tied of course to mortgages really impacted U.S. market. But seems like it's making a little bit of a comeback. I was reading through this story and I thought it was interesting because it seems like one of the reasons why this deal matters and one of the reasons why it could end up, at least to me working out OK for JPMorgan is that things have changed a little bit in the way people own property, what they do with that property. This sharing economy. This Airbnb economy has given folks a new way to utilize real estate, whether it's investment property, vacation homes, or whatnot. There are restrictions essentially that don't allow these mortgages to be sold to entities like Fannie and Freddie. Perhaps there is some opportunity here. What do you think about this move by JPMorgan, does it makes sense or is this an unnecessary risk?
Matt Frankel: Yeah, I like this move and it's really important to point out to investors because when you hear alternative mortgages, especially if you were around before the financial crisis. You think of things like those interest-only loans, they used to sell, the reverse-amortization loans. The zero-down loans that they were giving to people with 500 credit scores to buy four and five investment properties. I remember when I was in college I got preapproved for like a $400,000 mortgage when I was waiting tables. In like 2006, 2007, it was absolutely bananas who they were giving credit to and how much money they were willing to lend at that point. This is not that, alternative loans are making a comeback, but for two big reasons. I like that Jason just mentioned vacation and investment properties because there are new rules that govern how many, specifically the percentage of Fannie and Freddie's loans that can be of those two varieties. This was an obstacle when we just bought our second home, not too long ago. That was a big obstacle to getting a mortgage for it. That Fannie and Freddie can't buy too many of them anymore, so you're seeing a lot of these alternative lenders step in and facilitate those. Number two, it's because of all these jumbo loans, as they're called that you are seeing in the market. Home values are up by 20% or more in a lot of housing markets. The loan amounts are increasingly too big to be bought by Fannie and Freddie, so we're seeing a lot of these jumbo loans that would be part of this exchange that JPMorgan's investing in. There is going to be a growing need for this, especially if housing prices still go through the roof for a little while longer. But also because of these investments in vacation homes, because Fannie and Freddie just can't buy them as much anymore. It's definitely a need, and there needs to be a marketplace for vendors to buy and sell these because I'm sure after you refinance, you've got a letter saying your loan has been sold and here's where you send in your payment due now. I send my mortgage payments to Wells Fargo, that's not who I got the mortgage through.
Jason Moser: No. We send ours now to Truist, I still can't get used to saying that. He was driving me not for this Matt. It like it goes to Truist, but we're still having to log into like SunTrust. It's totally confusing. Thankfully, I got everything set up, it's just automatically paid, but we're still dealing with two brands here and BB, and T, and SunTrust. They haven't fully brought those together. I know that as a challenging deal. I remember working with Bank of America anytime there's a new bank brought into the system there, it wasn't like it just click a button overnight, everything was integrated. The integration takes forever. To your point, it does feel like they are filling a need. At the end of the day economics rule and where there is demand for something, someone's going to come in there with the supply. I certainly understand JPMorgan's angle from that perspective. To me given what we know about this business, given what we know about who manages it and Jamie Dimon, CEO of the business. I don't look at this as a terribly risky endeavor. Now I could see managers that perhaps are a little bit more short-term focused. It does seem like it could be a little bit risky making some bad decisions like insurance companies that are more patient and just don't chase business, and over the longer period of time, you will see that through their coverage ratio, it shows that they are efficient operators writing good business. Whereas insurance companies that chase bad business, that pans out of the numbers eventually. I think really I'd be concerned with banks chasing bad business, so to speak in this market. That would probably something to keep an eye on. I don't know that really worrying about that from JPMorgan's perspective is something that should be top of mind right now though.
Matt Frankel: My guess is they noticed this part of the mortgage business becoming more and more of their business. Like I said the jumbo loans especially are really becoming more of a part of the business. This wanted to get ahead of the trend, it's my feeling on why they made this investment. They don't want this to happen without them if this becomes like a real big part of the mortgage market. They're getting in on the ground floor.