Auto bankruptcies may signal trouble ahead for mortgage credit quality
JPMorgan Chase CEO Jamie Dimon warned this week that recent United States auto bankruptcies were “early signs” of excess in corporate lending.
The collapse of auto parts supplier First Brands and subprime lender Tricolor Holdings, Dimon said, reflected a decade of increasingly loose credit standards—a trend that could have broader implications for the mortgage market.
“We’ve had a credit bull market now for the better part of what, since 2010 or 2012? That’s like 14 years,” Dimon told CNBC on a call with reporters.
“These are early signs there might be some excess out there because of it. If we ever have a downturn, you’re going to see quite a bit more credit issues.”
Dimon’s remarks came as JPMorgan reported robust earnings, but the focus quickly shifted to credit losses and the potential for wider fallout.
The failures have already impacted major lenders. While JPMorgan managed to avoid losses from First Brands, it did lend to Tricolor, resulting in $170 million in charge-offs this quarter, according to CFO Jeremy Barnum.
“It is not our finest moment,” Dimon said. “When something like that happens, you could assume that we scour every issue. ... You can never completely avoid these things, but the discipline is to look at it in cold light and go through every single little thing.”
Other banks have also been caught in the fallout. Jefferies disclosed that funds it manages are owed $715 million from companies that bought First Brands inventory, while UBS reported $500 million in related exposure.
Regional lender Fifth Third expects up to $200 million in impairments tied to alleged fraud at Tricolor, according to Bloomberg.
Credit metrics at JPMorgan, including early-stage delinquencies, remain stable and “actually better than expected,” Barnum said. However, the bank is closely monitoring the labor market for signs of weakness that could spill into consumer credit, including mortgages.
Potential tightening of credit standards
When high-profile bankruptcies and charge-offs emerge in one lending segment, banks and non-bank lenders often reassess risk across their entire portfolios.
“When you see one cockroach, there are probably more. Everyone should be forewarned on this one,” Dimon said, suggesting that hidden risks may exist elsewhere.
For mortgage lenders, this could mean a more cautious approach to underwriting, with stricter verification of borrower income, employment, and creditworthiness. Lenders may also revisit risk models and stress-test portfolios for resilience against economic shocks.
Increased regulatory scrutiny
The fallout from lax lending in the auto sector is likely to draw the attention of regulators, who may extend their focus to mortgage origination and servicing practices.
After the 2008 financial crisis, mortgage lending underwent sweeping reforms, but regulators remain vigilant for signs of systemic risk.
If corporate credit issues begin to spill over into consumer lending, mortgage companies could face new compliance requirements or supervisory actions.
Impact on funding and liquidity
Banks facing unexpected losses in one area may pull back on warehouse lines or other credit facilities that support mortgage lending, particularly for non-bank originators.
This could tighten liquidity in the sector, raise funding costs, or limit the availability of certain loan products, especially those considered higher risk.
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