JP Morgan Chase 2008 Annual Report Download - page 107

JPMorgan Chase & Co./ 2008 Annual Report 105
The Firm regularly evaluates market conditions and overall economic
returns and makes an initial determination of whether new origina-
tions will be held-for-investment or sold within the foreseeable future.
The Firm also periodically evaluates the expected economic returns of
previously originated loans under prevailing market conditions to
determine whether their designation as held-for-sale or held-for-
investment continues to be appropriate. When the Firm determines
that a change in this designation is appropriate, the loans are trans-
ferred to the appropriate classification. During the third and fourth
quarters of 2007, in response to changes in market conditions, the
Firm designated as held-for-investment all new originations of sub-
prime mortgage loans, as well as subprime mortgage loans that were
previously designated held-for-sale. In addition, all new prime mort-
gage originations that cannot be sold to U.S. government agencies
and U.S. government-sponsored enterprises have been designated as
held-for-investment. Prime mortgage loans originated with the intent
to sell are accounted for at fair value under SFAS 159 and are classi-
fied as trading assets in the Consolidated Balance Sheets.
The following discussion relates to the specific loan and lending-relat-
ed categories within the consumer portfolio. Information regarding
combined loan-to-value ratios (“CLTVs”) and loan-to-value ratios
(“LTVs”) were estimated based on the initial appraisal obtained at the
time of origination, adjusted using relevant market indicies for hous-
ing price changes that have occurred since origination. The estimated
value of the homes could vary from actual market values due to
changes in condition of the underlying property, variations in housing
price changes within metropolitan statistical areas (“MSAs”) and
other factors.
Home equity: Home equity loans at December 31, 2008, were
$114.3 billion, excluding purchased credit-impaired loans, an increase
of $19.5 billion from year-end 2007, primarily reflecting the addition
of loans acquired in the Washington Mutual transaction. The 2008
provision for credit losses for the home equity portfolio includes net
increases of $2.2 billion to the allowance for loan losses for 2008 for
the heritage JPMorgan Chase portfolio as a result of the economic
environment noted above. The Firm estimates that loans with effective
CLTVs in excess of 100% represented approximately 22% of the
home equity portfolio. In response to continued economic weakness,
loan underwriting and account management criteria have been tight-
ened, with a particular focus on MSAs with the most significant hous-
ing price declines. New originations of home equity loans have
decreased significantly, as additional loss mitigation strategies have
been employed; these strategies include the elimination of stated
income and broker originated loans, a significant reduction of maxi-
mum CLTVs for new originations, which now range from 50% to
70%, and additional restrictions on new originations in geographic
areas experiencing the greatest housing price depreciation and high-
est unemployment. Other loss mitigation strategies include the reduc-
tion or closure of outstanding credit lines for borrowers who have
experienced significant increases in CLTVs or decreases in creditwor-
thiness (e.g. declines in FICO scores.)
Mortgage: Mortgage loans at December 31, 2008, which include
prime mortgages, subprime mortgages, option ARMs and loans held-
for-sale, were $96.8 billion, excluding purchased credit-impaired
loans, reflecting a $40.8 billion increase from year-end 2007, prima-
rily reflecting the addition of loans acquired in the Washington
Mutual transaction.
Prime mortgages of $72.5 billion increased $31.9 billion from
December 2007 as a result of loans acquired in the Washington
Mutual transaction and, to a lesser extent, additional originations
into the portfolio. The 2008 provision for credit losses includes a net
increase of $1.1 billion to the allowance for loan losses for the her-
itage JPMorgan Chase portfolio as a result of the economic environ-
ment noted above. The Firm estimates that loans with effective LTVs
in excess of 100% represented approximately 18% of the prime
mortgage portfolio. The Firm has tightened underwriting standards
for nonconforming prime mortgages in recent quarters, including
eliminating stated income products, reducing LTV maximums, and
eliminating the broker origination channel.
Subprime mortgages of $15.3 billion, excluding purchased credit-
impaired loans, decreased slightly from December 31, 2007, as the
discontinuation of new originations was predominantly offset by
loans acquired in the Washington Mutual transaction. The year-to-
date provision for credit losses includes a net increase of $1.4 billion
to the allowance for loan losses for the heritage JPMorgan Chase
portfolio as a result of the economic environment noted above. The
Firm estimates that loans with effective LTVs in excess of 100% rep-
resented approximately 27% of the subprime mortgage portfolio.
Option ARMs of $9.0 billion, excluding purchased credit-impaired
loans, were acquired in the Washington Mutual transaction. New
originations of option ARMs were discontinued by Washington
The following table presents the consumer nonperforming assets by business segment as of December 31, 2008 and 2007.
2008 2007
Assets acquired Assets acquired in
loan satisfactions loan satisfactions
As of December 31, Nonperforming Real estate Nonperforming Nonperforming Real estate Nonperforming
(in millions) loans owned Other assets loans owned Other assets
Retail Financial Services $ 6,548 $ 2,183 $ 110 $ 8,841 $ 2,760 $ 477 $ 72 $ 3,309
Card Services 4—— 47——7
Corporate/Private Equity 19 1 — 20 1——1
Total $ 6,571 $ 2,184 $ 110 $ 8,865 $ 2,768 $ 477 $ 72 $ 3,317