J.P. Morgan's Sweet WaMu Mortgage Deal

Back in the good old days when we weren't ina recession, banks had made loans and soon after sold them to bond investores. Now, the buyers are scouring mortgages, particularly defaulted ones, to see if the original lenders failed to meet the agreed standards. If a bank extended a martgaga to a borrower without required income documentation, the loan buyer can ask the bank to repurchase the loan or pay compensation. These "repurchase" claims are now forcing banks to build up reserves to absorb potential losses. In the second alone, 9 large banks were hit for a total of $2.85 billion. In contrast to last year as a whole where they were only hit for $5.53 billion. In 2008, J.P. Morgan bought certain assets and liabilities of failed washington Mutual Bank. In 2009 they cut a deal with government agencies that would resolve certain repurchase claims from WaMu mortgages. Just to give an idea of how much WaMu has in mortgages, between 2005 and 2008 WaMu wrote about $490 Billion worth in Mortgages. But Even with WaMu's mortgages, J.P. Morgan still appears to be in a much better position in terms of their mortgage repurchase reserve. As seen in the graph in the top right corner, Wells fargo and Bank of America both have given out mortgages that far exceed their mortgage repurchase reserve. J.P. morgan however only slightly exceed their reserve.

"Repurchasing" mortgages is a concept that is fairly new to me. But even so, it is easy enough to see that J.P. morgan is doing the right thing. By only giving out as much as they can afford to pay back, they are now in a much safer position then any other bank. If right now every person who has taken a loan out at Bank of America says that the bank must repurchase it, they wouldn't be able to. They wouldn't even be close, there would be a good $6-$7 billion difference between what their reserve covers and what they have given out in mortgages. Banks have been giving out loans to people who can't pay them back, which is a major reason why we are in this current economic situation. I personally believe banks should use J.P. Morgan as an example for how they give out loans. Once that is done we can take another step out of recession and into recovery.


Eavis, PE. (2010). J.p. morgan's sweet wamu mortgage deal. Retrieved from http://online.wsj.com/article/SB10001424052748703467004575463563588596660.html?KEYWORDS=WaMu