JP Morgan at Morgan Stanley Conference

A digest of some of the top insights that I’ve gathered from this week’s earnings calls.  Full notes can be found here.

A transitional year, smallest mortgage market in 14 years

“2014 is a transition year, it’s a transition year in many ways. Obviously we are optimizing against the capital and regulatory regime and also in the economy we are facing the smallest mortgage market that we’ve seen in over 14 years.”

Low reserve releases and weak markets revenue

“As you know we are facing smaller markets, revenue year-over-year, and although charge-offs continue to be very low, reserve releases will be lower this year than last.”

Positioned short duration

“as you know we are positioned short duration today relative to our expectation of a rising rate cycle.”

A significant portion of deposit growth has been because of QE

“we should note that a significant portion of the growth in deposits that the industry has experienced has been as a direct result of the Fed’s QE policy and reserve bills”

Outlining the expected sequence of events for Fed policy

“In terms of sequencing, what we expect is that Fed will cease asset purchases by the end of this year. The likely next step will be to drain liquidity from the system, potentially as much as a trillion dollars or so using the reverse three tier facility with non banks. This is likely to happen over a short period of time maybe a quarter or two and probably in the second or maybe in the second half of 2015. After which the Fed funds rates will start to be raised and lastly re-investments cease in order to shrink the remaining balance sheet there over time.”

Planning to lose $100 B in deposits in 2H15

“we estimate that we could experience during that same short time period potentially in the second half of 2015, deposit outflows of up to $100 billion.”

Low volume/volatility feels cyclical, not secular

“What we are experiencing right now does not feel secular, it feels cyclical.”

Refi burnout

“to talk specifically about production, the combination of re-fi burnout as well as slow purchase improvement has led to the smallest production market in over 14 years and for 2014, and for that matter, for 2015, the market is estimated to be $1.1 trillion or potentially smaller.”

Without refis the production business will depend on purchases

“going forward with re-fi largely burned out, the production business will be more exposed to recovering housing conditions than interest rate prima facie and housing conditions have been slow to recover so far in 2014.”

There is access to high LTV credit because GSEs are supporting that market

“High LTV credit is widely available today, in part due to GSE and government programs. Of course, the risk of the default and cost of default that services are thinking about may have an impact on that high end over time.”

You have to document your income now, and less access to ARMs and IOs

“the things that have really changed — two things that have really changed, especially for low FICO borrowers. First regulation, together with tighter market underwriting standards requires borrowers to fully document their income and assets and defend their ability to pay in a much more rigorous way, which is leading to a fewer qualified borrowers, together with the fact that affordability products like option ARMs and IOs are not being broadly offered across the FICO segment.”

Build a smaller, less volatile mortgage business

“We’re executing on the strategy we outlined at Investor Day in order to build a smaller, less volatile, higher quality mortgage business in the next cycle, one that will deliver 15% returns through the cycle.

What that means is in production, we continue to simplify our product set, continue to invest in technology to improve efficiency, to improve our productivity as well as the mortgage experience and focus on optimizing our retail distribution strategy.”