A Mopping-Up Quarter for JPMorgan, Other Mortgage Lenders

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NEW YORK (TheStreet) -- Some investors may have been shocked to see JPMorgan Chase report a third-quarter net loss Friday morning, but this is the perfect time for major banks to "clear the decks" in their mortgage businesses.

JPMorgan posted a third-quarter net loss of $380 million, or 17 cents a share, declining from earnings of $6.5 billion, or $1.60 a share in the second quarter, and $5.7 billion, or $1.40 a share, during the third quarter of 2012.

Analysts polled by Thomson Reuters had expected JPM to report third-quarter earnings of $4.7 billion, or $1.17 a share, which would have been a major decline in profits, factoring in three major regulatory settlements. These included an agreement to pay $410 million "in penalties and disgorgement to ratepayers," to settle Federal Energy Trading Commission charges of market manipulation, $920 million in fines to settle multiple probes of the 2012 "London Whale" trading fiasco and another $369 million in fines and customer refunds to settle regulatory charges of " illegal credit card practices."

JPMorgan has been negotiating with the Department of Justice, bank regulators and states' attorneys general to settle numerous criminal and civil investigations of its mortgage lending and sales activities. The settlement could end up as high as $11 billion, according to media reports, and the negotiations may have been held back by the ongoing partial shutdown of the federal government.

But the company has clearly signaled that a major settlement is coming, setting aside $9.15 billion for litigation expenses during the third quarter, which came to $7.20 billion, or $1.85 a share, after tax.

SunTrust late on Thursday signaled what was coming for the major mortgage players by announcing over $1 billion in negative extraordinary third-quarter items.

The mortgage items announced by SunTrust included repurchase claim settlements with Fannie Mae and Freddie Mac , which resulted in cash payments of roughly $268 million after credits for previously repurchased loans were deducted. The bank also was required to pay a $160 million fine to the Federal Reserve under the national mortgage settlement.

The largest item announced by SunTrust was a settlement of claims by the Federal Housing Administration resulting in a commitment to $500 million in "consumer relief" and a $468 million cash payment.