JP Morgan Chase 2006 Annual Report Download - page 43

JPMorgan Chase & Co. / 2006 Annual Report 41
Mortgage Banking
Selected income statement data
Year ended December 31, (in millions,
except ratios and where otherwise noted) 2006 2005 2004(a)
Production revenue $ 833 $ 744 $ 916
Net mortgage servicing revenue:
Servicing revenue 2,300 2,115 2,070
Changes in MSR asset fair value:
Due to inputs or assumptions in
model 165 770 (248)
Other changes in fair value (1,440) (1,295) (1,309)
Derivative valuation adjustments
and other (544) (494) 361
Total net mortgage servicing revenue 481 1,096 874
Total net revenue 1,314 1,840 1,790
Noninterest expense 1,341 1,239 1,364
Income (loss) before income tax expense (27) 601 426
Net income (loss) $ (17) $ 379 $ 269
ROE NM 24% 17%
ROA NM 1.69 1.10
Business metrics (in billions)
Third-party mortgage loans serviced
(ending) $ 526.7 $ 467.5 $ 430.9
MSR net carrying value (ending) 7.5 6.5 5.1
Average mortgage loans held-for-sale 12.8 12.1 11.4
Average assets 25.8 22.4 24.4
Average equity 1.7 1.6 1.6
Mortgage origination volume by
channel (in billions)
Retail $ 40.4 $ 46.3 $ 47.9
Wholesale 32.8 34.2 33.5
Correspondent (including negotiated
transactions) 45.9 48.5 64.2
Total $ 119.1 $ 129.0 $ 145.6
(a) 2004 results include six months of the combined Firm’s results and six months heritage
JPMorgan Chase results.
2006 compared with 2005
Mortgage Banking Net loss was $17 million compared with net income of
$379 million in the prior year. Total net revenue of $1.3 billion was down by
$526 million from the prior year due to a decline in net mortgage servicing
revenue offset partially by an increase in production revenue. Production rev-
enue was $833 million, up by $89 million, reflecting increased loan sales
and wider gain on sale margins that benefited from a shift in the sales mix.
Net mortgage servicing revenue, which includes loan servicing revenue, MSR
risk management results and other changes in fair value, was $481 million
compared with $1.1 billion in the prior year. Loan servicing revenue of $2.3
billion increased by $185 million on a 13% increase in third-party loans
serviced. MSR risk management revenue of negative $379 million was down
by $655 million from the prior year, including the impact of a $235 million
negative valuation adjustment to the MSR asset in the third quarter of 2006
due to changes and refinements to assumptions used in the MSR valuation
model. This result also reflected a fully hedged position in the current year.
Other changes in fair value of the MSR asset, representing runoff of the
asset against the realization of servicing cash flows, were negative $1.4 bil-
lion. Noninterest expense was $1.3 billion, up by $102 million, or 8%, due
primarily to higher compensation expense related to an increase in the num-
ber of loan officers.
Mortgage Banking origination channels comprise the following:
Retail – Borrowers who are buying or refinancing a home work directly
with a mortgage banker employed by the Firm using a branch office, the
Internet or by phone. Borrowers are frequently referred to a mortgage
banker by real estate brokers, home builders or other third parties.
Wholesale – A third-party mortgage broker refers loan applications to
a mortgage banker at the Firm. Brokers are independent loan originators
that specialize in finding and counseling borrowers but do not provide
funding for loans.
Correspondent – Banks, thrifts, other mortgage banks and other
financial institutions sell closed loans to the Firm.
Correspondent negotiated transactions (“CNT”) – Mid- to large-
sized mortgage lenders, banks and bank-owned mortgage companies
sell servicing to the Firm on an as-originated basis. These transactions
supplement traditional production channels and provide growth opportu-
nities in the servicing portfolio in stable and rising rate periods.
2005 compared with 2004
Mortgage Banking Net income was $379 million compared with $269 million
in the prior year. Net revenue of $1.8 billion was up by $50 million from the
prior year. Revenue comprises production revenue and net mortgage servicing
revenue. Production revenue was $744 million, down by $172 million, due to
an 11% decrease in mortgage originations. Net mortgage servicing revenue,
which includes loan servicing revenue, MSR risk management results and other
changes in fair value, was $1.1 billion compared with $874 million in the prior
year. Loan servicing revenue of $2.1 billion increased by $45 million on an 8%
increase in third-party loans serviced. MSR risk management revenue of $276
million was up by $163 million from the prior year, reflecting positive risk man-
agement results. Other changes in fair value of the MSR asset, representing
runoff of the asset against the realization of servicing cash flows, were nega-
tive $1.3 billion. Noninterest expense of $1.2 billion was down by $125 mil-
lion, or 9%, reflecting lower production volume and operating efficiencies.
Net Mortgage servicing revenue components:
Production income – Includes net gain or loss on sales of mortgage
loans, and other production related fees.
Servicing revenue – Represents all revenues earned from servicing
mortgage loans for third parties, including stated service fees, excess serv-
ice fees, late fees, and other ancillary fees.
Changes in MSR asset fair value due to inputs or assumptions
in model – Represents MSR asset fair value adjustments due to changes
in market-based inputs, such as interest rates and volatility, as well as
updates to valuation assumptions used in the valuation model.
Changes in MSR asset fair value due to other changes – Includes
changes in the MSR value due to servicing portfolio runoff (or time
decay). Effective January 1, 2006, the Firm implemented SFAS 156,
adopting fair value for the MSR asset. For the years ended December 31,
2005 and 2004, this amount represents MSR asset amortization expense
calculated in accordance with SFAS 140.
Derivative valuation adjustments and other – Changes in the fair
value of derivative instruments used to offset the impact of changes in
market-based inputs to the MSR valuation model.
MSR risk management results – Includes “Changes in MSR asset fair
value due to inputs or assumptions in model” and “Derivative valuation
adjustments and other.”