GNMAs and Nonaccrual: JPMorgan Chase Doing the Right Thing or Just Ignorant?

The pie charts below break down the maximum Government Guarantees on 90+ Days Past Due delinquencies and Nonaccrual loans for JPMorgan Chase:

JPM has $22.3 Billion in 90+ Days Past Due loans that are still recognizing interest income. A total of $601 million (or 2.69%) is guaranteed by the Government - either straight guarantee or guarantee on GNMA loans.

The second pie chart shows they have $27.08 Billion of loans in Nonaccrual Status with 33.16% ($8.98 Billion) in guarantees. Typically, Nonaccrual loans have a high risk of default and so JPM is focused on principal paydown on these loans - even though they have a government guarantee.

The two charts are non-exclusive, that is to say Nonaccrual Loans can be current, 30-89 days past due or 90+ days past due. If a loan is NA and 90+ then it would show up under Nonaccrual. While not a hard rule, typically the majority of Nonaccrual loans are 90+ days past due.

The fact that they have $22.3 Billion in loans four or more months past due and still generating interest income is fascinating in and of itself, but I'm going to focus on their use of Nonaccrual relative to the other 3 large institutions.

Bank of America:

Note how BAC has $11.68 Billion of GNMA Guarantees that are 90+ Days Past Due while only $304.9 Million on Nonaccrual.

Citigroup:

Citigroup has 60.67% of their 90+ Days Past Due guaranteed while 0.42% of their Nonaccrual. Hey, why put it on Nonaccrual if the Government is guaranteeing the number?

Wells Fargo:

You just got to love Wells Fargo. WFC has $37.9 Billion in late stage delinquencies earning interest of which $16.37 Billion is guaranteed by the government. The majority of the number is GNMA loans at $14.48 Billion. How many GNMA loans do they have in Nonaccrual status??? None. Remember this when it comes to the next quarterly record of Interest Income generation.

There are a number of observations to make here, but I'm going to next focus on the potential annual impact to Interest Income. The table below details the 4 banks and where they have nonperforming GNMA loans allocated.

JPM clearly stands alone in their use of Nonaccrual on GNMAs. Using a 5% interest rate against the Nonaccrual $8.9 Billion you see that JPM is "losing" approximately $445 million in annual interest income. Compared to the other 3 banks you see that JPM is either very honorable or incredibly stupid. While a loss to JPM, it will be a gain to the taxpayer when these loans start charging off since they will have a lower principal balance.

Meanwhile BAC is making money off these guarantees to the tune of $568 million per year, while Citigroup is up $253 million. Wells Fargo is generating another $724 million in annual interest income. This is an astounding number and is basically a transfer payment from the taxpayer.

While $445 million is now peanuts to these behemoths, it is important to note that there is a potential difference of $1.1 Billion in annual net interest income between JPM and WFC. It makes me wonder if JPM is aware of this and will we start to see them begin taking loans off Nonaccrual to close the gap. While irritating as hell to me as a taxpayer, it is what I'd recommend.

Shameless Plug: The charts from above and more are coming in the next big upgrade of www.wlmlab.com.

Comments

[bmoreland]

There is no definition of what is guaranteed at the FDIC that I have been able to find. While no expert on GNMA loans, I'd be surprised if the interest was guaranteed. The vast majority of banks are doing what JPM is with the Nonaccruals. While not entirely unique, BAC, C & WFC stand out in their marked difference.

[Sour Grapes]

What are the terms government guarantee?  Does the government guarantee prinicpal and interest or just principal?