While the terms of the deal generally mitigate the aforementioned risk, JPMorgan Chase will have to take some other steps as well to generate value from the servicing it’ll be acquiring with First Republic’s loans
One challenge in doing that will be ensuring it keeps wealthy customers who may’ve been drawn to First Republic by its boutique servicing culture will make the transition to JPMorgan Chase.
“We’re going to fight hard to keep all the clients,” JPMorgan Chase CFO Jeremy Barnum said in a call about the acquisition.
While competition for the loans and their servicing has reportedly been thin, — with some banks increasingly wary of the jumbo market following First Republic’s woes in addition to rising concerns about credit — there will still be some.
“First Republic’s level of customer service was very unique and that’s why they had a wealthy high end-clientele,” Stevens said. He noted that JPMorgan Chase, while rebranding, is keeping some of FRB’s facilities and staff.
Fitch Ratings has noted that FRB had a model in which the bank linked the fortunes of its relationship managers on the origination side with servicing, including “personal involvement” with delinquent or defaulted loans.
This included “a clawback feature that can negatively affect the relationship manager’s commission structure,” according to the Fitch report.
History suggests First Republic’s loans have strong credit, said Jack Kahan, a senior managing director at Kroll Bond Rating Agency whose team analyzed First Republic’s private-label residential MBS exposures.
“First Republic is known for stellar mortgage performance,” Kahan said, noting that the bank’s 30-day-plus delinquency rate in KBRA deals was just 0.3% vs. 1.3% for the larger universe of loans in the deals it was involved in.
Although First Republic’s been less involved in the small private label RMBS market more recently, many of its loans refinanced out of pools when rates were low, and banks more often portfolio jumbo, it’s been a significant contributor.
