JP Morgan Chase 2013 Annual Report Download - page 17

1515
unable to reform the government-sponsored
enterprises (GSE) or to get the securitization
markets healthy again. This has real costs to
consumers, especially for lower credit-quality
consumers and particularly for government-
guaranteed mortgages, which have become
more expensive, more time intensive and
less available for consumers. Originators are
being more conservative because making
loans that may default has become far more
risky and costly due to:
• The highly litigious environment and
uncertainty surrounding Federal Housing
Administration (FHA) guarantees with
respect to FHA mortgages.
• The ongoing “put-back” risk and the
litigation costs around reps and warranties
from the GSEs and sophisticated private
investors.
• The increasing prescriptiveness of rules on
servicing from dierent – and sometimes
conflicting – regulators and government
agencies.
• The increasing diculty of moving
servicing – again, especially for high-risk
loans, which often are unprofitable to us and
other large financial institutions – to other
servicers that have systems and processes
better able to serve these customers.
These issues make mortgages more costly
and unpredictable for companies and far less
consumer friendly. In many cases, deserving
lower- and middle-income consumers may
pay far more than they might have in the
past for a mortgage or, worse yet, they won’t
be able to get one.
We need for all those involved in the mort-
gage business to come up with a practical
set of coherent and consistent policies that
work for originators, servicers, investors,
unprotable; therefore, over time, banks
probably will minimize this type of deposit,
and clients will seek other alternatives, prob-
ably in the money markets.
Committed, undrawn revolvers. Many clients
have large, committed, unused revolvers
so they can manage their cash flows and
not leave too much unused cash on their
balance sheet. Because new rules impose
liquidity and additional capital requirements
on committed, undrawn revolvers, the cost
involved in providing them could increase
by up to 60 basis points, depending on the
client segment and nature of the facility.
Banks will either have to charge more for
this product or focus more acutely on the
nature and value of the particular client rela-
tionship as a whole in considering whether
to make revolvers available to that client.
Trade finance. The cost of short-term trade
finance and standby letters of credit also will
increase dramatically, with pricing poten-
tially up by 75 basis points in the long term.
The rates business (mostly trading government
securities and interest rate swaps). The new
rules have a huge eect on this business
because they require substantially more
capital and liquidity. And for some banks,
the rates business has gone from profitable
to unprofitable, causing some banks to exit
the business altogether. Because of our large
volume and low costs, we already have begun
to make significant changes to this business
and expect to maintain decent profitability.
The mortgage business. The U.S. mortgage
market still faces huge hurdles and has a
long way to go before it is a well-functioning
market that is good for consumers and the
country’s economic health (and makes sense
for financial companies). There has been
a large increase in the capital required to
service and hold mortgages. Servicing itself
has become far more costly and dangerous
to the servicer – servicing costs alone have
gone up 20 basis points. We still have been