JP Morgan Chase 2008 Annual Report Download - page 105

JPMorgan Chase & Co./ 2008 Annual Report 103
CONSUMER CREDIT PORTFOLIO
JPMorgan Chase’s consumer portfolio consists primarily of residential
mortgages, home equity loans, credit cards, auto loans, student loans
and business banking loans, with a primary focus on serving the
prime consumer credit market. The consumer credit portfolio also
includes certain loans acquired in the Washington Mutual transaction,
primarily mortgage, home equity and credit card loans. The RFS port-
folio includes home equity lines of credit and mortgage loans with
interest-only payment options to predominantly prime borrowers, as
well as certain payment option loans acquired from Washington
Mutual that may result in negative amortization.
A substantial portion of the consumer loans acquired in the
Washington Mutual transaction were identified as credit-impaired in
the third quarter of 2008 based on a preliminary analysis of the
acquired portfolio. In addition, as of the acquisition date, a $1.4 billion
accounting conformity provision was recorded to reflect the Firm’s
preliminary estimate of incurred losses related to the portion of the
acquired consumer loans that were not considered to be credit-
impaired. During the fourth quarter of 2008, the analysis of acquired
loans was substantially completed, resulting in a $12.4 billion increase
in the credit-impaired loan balances and a corresponding decrease in
the non-credit-impaired loan balances. In addition, the estimate of
incurred losses related to the non-credit-impaired portfolio was final-
ized, resulting in a $476 million decrease in the accounting conformity
provision for these loans. The purchased credit-impaired loans, which
were identified as impaired based on an analysis of risk characteristics,
including product type, loan-to-value ratios, FICO scores and delin-
quency status, are accounted for under SOP 03-3 and were recorded
at fair value under SOP 03-3 as of the acquisition date. The fair value
of these loans includes an estimate of losses that are expected to be
incurred over the estimated remaining lives of the loans, and therefore
no allowance for loan losses was recorded for these loans as of the
transaction date.
The credit performance of the consumer portfolio across the entire
consumer credit product spectrum continues to be negatively affected
by the economic environment. High unemployment and weaker over-
all economic conditions have resulted in increased delinquencies, and
continued weak housing prices have driven a significant increase in
loss severity. Nonperforming loans and assets continued to increase
through year-end 2008, a key indicator that charge-offs will continue
to rise in 2009. Additional deterioration in the overall economic envi-
ronment, including continued deterioration in the labor market, could
cause delinquencies to increase beyond the Firm’s current expecta-
tions, resulting in significant increases in losses in 2009.
Over the past year, the Firm has taken actions to reduce risk exposure
by tightening both underwriting and loan qualification standards for
real estate lending, as well as for consumer lending for non-real
estate products. Tighter income verification, more conservative collat-
eral valuation, reduced loan-to-value maximums and higher FICO and
custom risk score requirements are just some of the actions taken to
date to mitigate risk. These actions have resulted in significant reduc-
tions in new originations of “risk layered” loans (e.g., loans with high
loan-to-value ratios to borrowers with low FICO scores) and improved
alignment of loan pricing. New originations of subprime mortgage
loans, option ARMs and broker originated-mortgage and home equity
loans have been eliminated entirely.
In the fourth quarter of 2008, the Firm announced plans to signifi-
cantly expand loss mitigation efforts related to its mortgage and
home equity portfolios, including a systematic review of the real
estate portfolio to identify homeowners most in need of assistance. In
addition, the Firm announced plans to open regional counseling cen-
ters, hire additional loan counselors, introduce new financing alterna-
tives, proactively reach out to borrowers to offer pre-qualified modifi-
cations, and commence a new process to independently review each
Top 5 emerging markets country exposure
At December 31, 2008 Cross-border Total
(in billions) Lending(a) Trading(b) Other(c) Total Local(d) exposure
South Korea $2.9 $1.6 $ 0.9 $ 5.4 $2.3 $ 7.7
India 2.2 2.8 0.9 5.9 0.6 6.5
China 1.8 1.6 0.3 3.7 0.8 4.5
Brazil 1.8 — 0.5 2.3 1.3 3.6
Taiwan 0.1 0.2 0.3 0.6 2.5 3.1
At December 31, 2007 Cross-border Total
(in billions) Lending(a) Trading(b) Other(c) Total Local(d) exposure
South Korea $ 3.2 $ 2.6 $ 0.7 $ 6.5 $ 3.4 $ 9.9
Brazil 1.1 (0.7) 1.2 1.6 5.0 6.6
Russia 2.9 1.0 0.2 4.1 0.4 4.5
India 1.9 0.8 0.8 3.5 0.6 4.1
China 2.2 0.3 0.4 2.9 0.3 3.2
(a) Lending includes loans and accrued interest receivable, interest-bearing deposits with banks, acceptances, other monetary assets, issued letters of credit net of participations, and
undrawn commitments to extend credit.
(b) Trading includes: (1) issuer exposure on cross-border debt and equity instruments, held both in trading and investment accounts, adjusted for the impact of issuer hedges, including
credit derivatives; and (2) counterparty exposure on derivative and foreign exchange contracts as well as security financing trades (resale agreements and securities borrowed).
(c) Other represents mainly local exposure funded cross-border.
(d) Local exposure is defined as exposure to a country denominated in local currency, booked and funded locally. Any exposure not meeting these criteria is defined as cross-border exposure.