Top Lenders’ Early Earnings Point to Continuing Mortgage Losses

""JPMorgan Chase"":http://www.jpmorganchase.com kicked off the banking sector's second-quarter earnings season with a $5.4 billion profit. It was followed by ""Citigroup's"":http://citigroup.com announcement late last week that it pulled in net income of $3.3 billion during the April-June timeframe.

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Both New York-based companies' quarterly results beat market expectations. The favorable numbers were pinned on investment banking for JPMorgan and an expanding international business for Citi.

Neither lender, however, escaped mortgage-related losses â€" a trait that is likely to show up on balance sheets throughout the industry as banks continue to grapple with high volumes of delinquencies and additional costs tied to foreclosure reviews and litigation expenses.

Jamie Dimon, chairman and CEO of JPMorgan Chase, said “second-quarter earnings reflected solid performance across most of our businesses,” but he also added that the lenders retail financial services division “continued to experience high losses for mortgage-related issues.”

Dimon said delinquencies and net charge-offs within JPMorgan’s mortgage portfolio “improved modestly” compared with the prior quarter, but nevertheless “remained high.”

“We have been working hard to fix our problems and address past mistakes,” Dimon stated in reference to recent foreclosure paperwork.

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“We have already incurred significant costs, charged-off substantial amounts and established significant reserves for mortgage-related issues,” he said. “Unfortunately, it will take some time to resolve these issues and it is possible we will incur additional costs along the way. However, in time, these costs will normalize as well.”

JPMorgan’s mortgage and litigation costs, which includes foreclosures and loan repurchases, totaled $2.5 billion during the second quarter. Over the past year and a half, this line item has cost the company some $20 billion.

Citi ended the second quarter with $73 billion in past due residential first mortgages housed under its Citi Holdings banner. That’s down 19 percent from a year ago.

John Gerspach, Citi’s CFO, explained that the sequential decline in first mortgage delinquencies again was primarily due to continued asset sales, as the company sold nearly $800 million in delinquent mortgages in the second quarter.

As of the end of Q2, roughly $10 billion of the lender’s total loan loss reserves was allocated to North America real estate lending in Citi Holdings, where the company retains under-performing assets.

Gerspach also noted that in recent quarters, the pace of Citi’s modification activity has slowed.

“Going forward, we expect fewer new modifications, while some portion of our previous modifications will re-default. As a result, delinquency trends may deteriorate,” he said.

Gerspach explained that the company’s re-default rate on mortgages modified through the government’s Home Affordable Modification Program (HAMP) remains below 15 percent. However, re-defaults on loans modified under Citi’s own proprietary programs is around 25 percent.

Citi’s losses on mortgage repurchases came to $171 million for the second quarter, up from $151 million over the previous three-month period.

""Bank of America"":http://www.bankofamerica.com is the next lending giant to release earnings, scheduled for Tuesday morning.