JPMorgan Chase said its correspondent division, which has been buying subprime mortgages only in bulk, will begin buying them on a loan-by-loan basis this year.

Such "flow" programs are increasingly important to originators concerned about constrained liquidity in the market. Like some other large mortgage lenders - including the biggest, Countrywide Financial Corp. - JPMorgan has framed the subprime crash as an opportunity to strengthen its position in the business.

The New York banking company has announced the plan to begin buying loans one at a time and said it had hired Rick Boyd to be its subprime flow manager. Boyd joined JPMorgan from Citigroup's CitiMortgage.

Tom Kelly, a JPMorgan spokesman, would not discuss the rationale for creating a subprime flow business.

During an investor presentation last month, James Dimon, JPMorgan's chief executive, said that its share of subprime originations had increased, since the decline in its production had not matched the precipitous industrywide drop. Though he said he expects the turmoil to continue, he declared that subprime "is a good business."

The turmoil "will go on for a while," Dimon said. "You will read about lawsuits and regulations and appraisals and brokers going out of business," and investors in collateralized debt obligations "are going to sue."

"I think a lot of the owners don't even know they have losses yet in some of these things, and they're probably just being notified as we speak," he said. "You have the repricing that's still going to take place, so you have headline articles if you travel around the country, every market you go to - foreclosures, unfairness of repricing. But ... it will be a good business; we will be a big winner in it."

A recession, Dimon said, is "the only thing that will make it a lot worse."

He also called the company's mortgage business vital to its investment banking ambitions.

"We can do [a] whole bunch of different products in Chase Home Finance, and we can build a real trading business and underwriting business in the investment bank," he said.

Flow sales have become critical to originators such as Topdot Mortgage, which has looked to the "big names like Citi, Wells Fargo, and Countrywide" that buy its loans for stability, according to Marc Silvera, the Jericho, N.Y., company's secondary marketing director.

Rationale Against Bulk

Because of "the lack of stability and liquidity in the market ... you don't want to aggregate loans at this point," Silvera said. "You could be bulking loans that have no home. Pretty much at this point, we're just ... locking the loan" and putting it up for sale within 48 hours.

"I think you gotta be nuts to bulk right now," he said.

Overall, correspondents' share of mortgage production in the first quarter dropped 3.4 percentage points from the fourth quarter, though it climbed 60 basis points from a year earlier, to 31.2%, according to the newsletter Inside Mortgage Finance.

A good chunk of the decline can be attributed to HSBC Holdings, which shut its correspondent channel last month after racking up unexpected credit costs. In the first quarter, correspondents' share of HSBC Mortgage Services' production fell by about three quarters from a year earlier, to 15.4%.

In an interview this month, Brendan McDonagh, chief executive of the London company's U.S. consumer finance business, emphasized the strength of its retail branch network, which he said was not associated with any of the extraordinary credit problems.

Correspondents' share of originations at JPMorgan's home finance unit was relatively stable in the first quarter. It fell just 8 basis points from a year earlier, to 29.2%.

The most dramatic rise in the contribution from correspondents was at American Home Mortgage Investment Corp., where it grew more than fivefold, to 24.9%. The Melville, N.Y. REIT began buying correspondent mortgages on a flow basis in 2005 and added bulk purchase programs this year.

Correspondents' share of originations fell 17.1 percentage points at Wells Fargo, to 30.7%, and 12.8 percentage points at Washington Mutual, to 15.0%.

During a presentation on May 31, Wells Fargo CEO Richard Kovacevich said the company focuses "on the retail channel because of the economics and our ability to more effectively cross-sell to those customers." Similarly, at the same conference, Washington Mutual CEO Kerry Killinger said, "We focused on our retail store customers like never before, placing about 500 loan specialists in our retail branches to increase first mortgage sales there."

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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