JPMorgan Chase reclassified $1.6 billion of mortgages as nonperforming loans at the urging of regulators — even though the loans are still in good shape, executives said Friday.
Other U.S. banks may also have been pushed to reclassify similar loans, the executives said.
The JPMorgan Chase loans are second mortgages that are current, but are subordinate to delinquent first mortgages, Chairman and Chief Executive Jamie Dimon said during a conference call to discuss first-quarter earnings.
"These are second mortgages that are paying behind delinquent firsts," Dimon said. "We're reserving those because we know they're going to go bad. We're just putting them in the nonperforming category before they're nonperforming."
After being asked during the conference call why the bank's nonperforming loans increased from the previous quarter, Chief Financial Officer Doug Braunstein hesitated before answering. But Dimon said it was "OK," so Braunstein provided the initial explanation about the about the second-mortgage reclassification.
The loans are being reported as nonaccrual "based upon regulatory guidance issued in the first quarter," Chase said in a news release.
Chase did not identify, during the conference call, which agency provided the guidance. Two of JPMorgan Chase's federal regulators — the Federal Reserve Board and the Office of the Comptroller of the Currency — did not immediately respond to a reporter's questions.
The vast majority — about 88% — of the $1.6 billion in second mortgages are current, Braunstein said. But the New York bank expects they will go delinquent soon.
When first mortgages go delinquent before a second mortgage, the junior mortgage "almost always becomes a total loss" later, Dimon said.
JPMorgan Chase has a total of about $4 billion in second mortgages that are current, but subordinate to a delinquent first mortgage, Dimon said. But regulators asked it to reclassify only $1.6 billion of that group. Dimon said that only $1.6 billion was moved to nonperforming because of reasons related to their loan-to-value ratio, but he did not provide a further explanation during the conference call. A JPMorgan Chase spokesman did not immediately return a phone call seeking comment.
As a result of the reclassification, Chase's total nonaccrual loans increased 14% in the first quarter to $8.3 billion, from $7.3 billion a year earlier.