JP Morgan Chase 2008 Annual Report Download - page 202

Notes to consolidated financial statements
200 JPMorgan Chase & Co./ 2008 Annual Report
The table below outlines the key economic assumptions used to
determine the fair value of the Firm’s MSRs at December 31, 2008
and 2007, respectively; and it outlines the sensitivities of those fair
values to immediate 10% and 20% adverse changes in those
assumptions.
Year ended December 31
(in millions, except rates) 2008 2007
Weighted-average prepayment speed assumption (CPR) 35.21% 12.49%
Impact on fair value of 10% adverse change $(1,039) $ (481)
Impact on fair value of 20% adverse change (1,970) (926)
Weighted-average option adjusted spread 3.80% 3.00%
Impact on fair value of 100 basis points
adverse change $ (311) $ (311)
Impact on fair value of 200 basis points
adverse change (606) (599)
CPR: Constant prepayment rate.
The sensitivity analysis in the preceding table is hypothetical and
should be used with caution. Changes in fair value based upon a
10% and 20% variation in assumptions generally cannot be easily
extrapolated because the relationship of the change in the assump-
tions to the change in fair value may not be linear. Also, in this table,
the effect that a change in a particular assumption may have on the
fair value is calculated without changing any other assumption. In
reality, changes in one factor may result in changes in another, which
might magnify or counteract the sensitivities.
Purchased credit card relationships and all other
intangible assets
During 2008, purchased credit card relationships, other credit card-
related intangibles and core deposit intangibles decreased $727 mil-
lion, primarily as a result of amortization expense, partially offset by
an increase in intangibles recognized related to the dissolution of the
Chase Paymentech Solutions joint venture. Other intangibles (net of
amortization) increased $209 million primarily as a result of the pur-
chase of an additional equity interest in Highbridge as well as the
acquisition of an institutional global custody portfolio.
Except for $517 million of indefinite-lived intangibles related to asset
management advisory contracts, which are not amortized but are
tested for impairment at least annually, the remainder of the Firm’s
other acquired intangible assets are subject to amortization.
The following table summarizes MSR activity for the years ended
December 31, 2008, 2007 and 2006.
Year ended December 31,
(in millions, except where
otherwise noted) 2008 2007 2006
Balance at beginning of period after
valuation allowance $ 8,632 $ 7,546 $ 6,452
Cumulative effect of change in
accounting principle —— 230
Fair value at beginning
of period 8,632 7,546 6,682
MSR activity
Originations of MSRs 3,061 2,335 1,512
Purchase of MSRs 6,755(c) 798 627
Total additions 9,816 3,133 2,139
Change in valuation due to inputs
and assumptions(a) (6,933) (516) 165
Other changes in fair value(b) (2,112) (1,531) (1,440)
Total change in fair value of MSRs (9,045)(d) (2,047) (1,275)
Fair value at December 31 $ 9,403 $ 8,632 $ 7,546
Change in unrealized gains (losses)
included in income related to MSRs
held at December 31 $ (6,933) $ (516) NA
Contractual service fees, late fees
and other ancillary fees included
in income $ 3,353 $ 2,429 $ 2,038
Third-party mortgage loans
serviced at December 31, (in billions) $ 1,185.0 $ 614.7 $ 526.7
(a) Represents MSR asset fair value adjustments due to changes in inputs, such as
interest rates and volatility, as well as updates to assumptions used in the valu-
ation model. This caption also represents total realized and unrealized gains
(losses) included in net income per the SFAS 157 disclosure for fair value meas-
urement using significant unobservable inputs (level 3).
(b) Includes changes in the MSR value due to modeled servicing portfolio runoff (or
time decay). This caption represents the impact of cash settlements per the SFAS
157 disclosure for fair value measurement using significant unobservable inputs
(level 3).
(c) Includes MSRs acquired as a result of the Washington Mutual transaction (of
which, $59 million related to commercial real estate) and the Bear Stearns merger.
For further discussion, see Note 2 on pages 135–140 of this Annual Report.
(d) Includes $4 million related to commercial real estate.