JP Morgan Chase’s acquisition of failed Washington Mutual Bank will create a leviathan in mortgage lending, second in originations only to the juggernaut created by Bank of America’s acquisition of Countrywide Financial Corp.

JP Morgan said its acquisition of WaMu will allow it to grow in major markets like California, Florida and Washington state, and create a company with 5,400 branches in 23 states.

The combined bank will also be the largest U.S. depository institution, with $911 billion in deposits; the biggest provider of credit-card services, with $181 billion in outstanding debt on 170 million credit cards; and the second-largest retail bank, with 24.5 million checking accounts.

As was the case with Bank of America’s Countrywide purchase, JP Morgan paid a relatively small price up front but also takes on billions of dollars worth of troubled mortgage loans.

JP Morgan paid $1.9 billion to the Federal Deposit Insurance Corp., which was named receiver after the Office of Thrift Supervision closed WaMu down Thursday evening in the biggest bank failure in U.S. history. The payment allowed the change in ownership to take place without any losses for WaMu depositors or the FDIC’s $45.2 billion deposit insurance fund, the FDIC said.

OTS concluded that WaMu — which employed more than 43,000 workers, operated 2,200 branch offices in 15 states, and had $188.3 billion in deposits at the end of June — was "in an unsafe and unsound condition to transact business" after a $16.7 billion run on deposits that began Sept. 15.

Losers in the deal are holders of WaMu senior unsecured debt, subordinated debt and preferred stock, which were excluded from the acquisition.

JPMorgan said it would mark down the loan portfolio it’s acquiring from WaMu by approximately $31 billion — an estimate that could change if Congress approves the Treasury Department’s plan to buy $700 billion or more of such assets or the economy worsens.

In a presentation to investors, JPMorgan said that as of the end of 2007 the estimated "life loss" for WaMu’s home loan portfolio was $36.2 billion. That included $14.2 billion in projected losses from home equity and home-equity-line-of-credit loans, $11.8 billion from pay-option adjustable-rate mortgage (ARM) loans, and $7.5 billion in losses on subprime loans.

Those estimates assumed that the peak-to-trough decline in home prices would total 25 percent for the nation as a whole and 44 percent in California and Florida, with most of those declines having already occurred. Under a deeper recession in which peak-to-trough home prices fall 28 percent, life losses from the end of 2007 could hit $42 billion.

A worst-case scenario in which a severe recession produces peak-to-trough price declines of 37 percent might drive losses on WaMu’s home-loan portfolio to $54 billion, JPMorgan disclosed, saying it planned to raise additional capital as part of its acquisition.

The acquisition, which also extends JPMorgan’s retail branch network into Georgia, Idaho, Nevada and Oregon, could help the combined banks challenge Bank of America’s soon-to-be status as the nation’s largest mortgage lender after finalizing its purchase of Countrywide.

Although the combined $92.9 billion in residential mortgage originations Bank of America and Countrywide tallied in the second quarter far surpass $69.8 billion in originations by JP Morgan and WaMu during the same three-month period, WaMu’s $8.4 billion in originations represented a 76 percent decline from the $36 billion in loans originated in the same quarter a year ago.

When the credit crunch hit in August 2007, WaMu was forced to transfer $17 billion in nonconforming real estate loans it had been planning to sell to investors to its own loan portfolio, and keep loans not eligible for securitization by Fannie Mae and Freddie Mac on its books. That, along with tighter underwriting standards and reduced demand for home loans, helped curtail WaMu’s originations.

In the fourth quarter of 2007, WaMu discontinued all remaining subprime mortgage lending, wound down warehouse lending operations, and this year eliminated negatively amortizing products including option ARMs.

Some of the infrastructure WaMu employed to originate those loans is gone. In an attempt to cut costs, the company laid off thousands of workers and closed all 336 freestanding home loan centers it was operating at the end of last year.

But to the extent that WaMu’s cutbacks in lending were forced by the company’s inability to raise capital, the thrift’s acquisition by JP Morgan could help it boost mortgage originations.

Increasing JP Morgan’s regional banking presence not only strengthens the company’s retail business but benefits other business lines, including the company’s commercial banking, business banking, credit card, and asset management groups, said Jamie Dimon, company chairman and chief executive officer.




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