JP Morgan Chase 2008 Annual Report Download - page 26

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We believe these mortgage modifications are economi-
cally and morally the right thing to do and that the pro-
gram underscores the importance of mutual respect – by
treating others in the way that we would like to be treat-
ed in the same situation – while upholding the essential
principle that individuals, businesses and corporations
should repay their loans if they can afford to do so. In
our view, its completeness eliminates the need for judi-
cial modification in bankruptcy proceedings. However,
if legislated, judicial modifications should be consistent
with this plan and focus only on borrowers who either
don’t qualify or have not been offered a modification.
Beyond that, it is time to quickly implement the mort-
gage modification program – even if it is not perfect in
everyone’s view – and to move on.
B. Comments on the derivatives business
Derivatives have become an essential and widely used
risk management tool. The International Swaps and
Derivatives Association estimates that 90% of the
Fortune 500, 50% of mid-sized companies and thou-
sands of other, smaller U.S. companies use derivatives
to manage certain risks, including currency and interest
rate risk. As such, derivatives are a large business for
JPMorgan Chase and for firms around the world. It is
important to note that derivatives in and of themselves
did not cause this crisis. In fact, derivatives have per-
formed fairly well in this crisis environment. However,
it is clear that derivatives, at least in financial reporting,
are hard to understand, lack transparency and did con-
tribute somewhat to the crisis. At JPMorgan Chase, we
believe derivatives, when used properly, play an impor-
tant role in managing risk, and we are trying to address
the concerns about derivatives.
• We have been standard setters in bringing more
transparency to our financial reporting and will
continue to be. In this report, you will find extensive
details on our counterparty exposures and other risk
considerations that are central to understanding our
derivatives and other trading businesses.
• Some of the concerns about derivatives have to do
with the large notional amounts. But those figures
are reference measurements and do not reflect actual
V. WHAT COMES NEXT FOR
JPMORGAN CHASE
Your management team is deeply engaged and is act-
ing with extreme caution in navigating these uncharted
waters. The U.S. Treasury and the Federal Reserve have
continued to take bold and dramatic action, as have
central banks and governments around the world. In
this next section, we will discuss some of the important
issues for JPMorgan Chase.
A. Our leadership in mortgage modifications and
support for the administration’s mortgage programs
JPMorgan Chase is at the forefront of foreclosure pre-
vention and mortgage modifications nationally. Our
foreclosure prevention efforts are intended to reach
both the $300 billion of loans that we own and the
$1.2 trillion of investor-owned loans that we service.
We already have helped keep 330,000 borrowers in
their homes and expect to help avert 650,000 fore-
closures by the end of 2010. We are committed to
keeping borrowers in their homes by making sustain-
able, properly written loan modifications, in many
cases before a default occurs.
We believe it is in the best interests of both the home-
owner and the mortgage-holder to take corrective
action as soon as possible. Our re-default rates are half
the rates that the OCC has said are experienced by
national servicers. Re-default rates in the industry
generally will come down once modifications are
done with proper underwriting and as the economy
and home prices start to improve. If re-default rates
were extremely low, we probably should be doing
more modifications.
We strongly support the Obama administration’s
mortgage modification program. The plan’s features
are aligned with the program we already had imple-
mented, extending them to more struggling homeown-
ers and providing us and other servicers with more
options to keep families in their homes. We also sup-
port the program because the guidelines establish a
clear, fair and consistent set of standards for all ser-
vicers to follow. It is intended for borrowers with
mortgages below $729,750; and all borrowers must
fully document their income, clearly demonstrate
financial hardship and live in the home.