JP Morgan Chase 2008 Annual Report Download - page 62

Management’s discussion and analysis
60 JPMorgan Chase & Co./ 2008 Annual Report
2008 compared with 2007
Consumer Lending net loss was $2.1 billion, compared with net
income of $680 million in the prior year. Total net revenue was $10.9
billion, up $3.6 billion, or 48%, driven by higher mortgage fees and
related income (due primarily to positive MSR risk management
results), the impact of the Washington Mutual transaction, higher
loan balances and wider loan spreads.
The increase in mortgage fees and related income was primarily driv-
en by higher net mortgage servicing revenue. Mortgage production
revenue of $898 million was up $18 million, as higher mortgage
origination volume was predominantly offset by an increase in
reserves related to the repurchase of previously sold loans and mark-
downs of the mortgage warehouse. Net mortgage servicing revenue
(which includes loan servicing revenue, MSR risk management results
and other changes in fair value) was $2.7 billion, an increase of $1.5
billion, or 124%, from the prior year. Loan servicing revenue was
$3.3 billion, an increase of $924 million. Third-party loans serviced
increased 91%, primarily due to the Washington Mutual transaction.
MSR risk management results were $1.5 billion, compared with
$411 million in the prior year. Other changes in fair value of the MSR
asset were negative $2.1 billion, compared with negative $1.5 bil-
lion in the prior year.
The provision for credit losses was $9.5 billion, compared with $2.5
billion in the prior year. The provision reflected weakness in the home
equity and mortgage portfolios (see Retail Financial Services discus-
sion of the provision for credit losses for further detail).
Noninterest expense was $4.8 billion, up $1.1 billion, or 30%, from
the prior year, reflecting higher mortgage reinsurance losses, the
impact of the Washington Mutual transaction and higher servicing
expense due to increased delinquencies and defaults.
2007 compared with 2006
Consumer Lending net income was $680 million, a decrease of $611
million, or 47%, from the prior year. Total net revenue was $7.3 bil-
lion, up $1.5 billion, or 25%, benefiting from positive MSR risk man-
agement results, increased mortgage production revenue, wider loan
spreads and the absence of a prior-year $233 million loss related to
$13.3 billion of mortgage loans transferred to held-for-sale. These
benefits were offset partially by the sale of the insurance business.
Mortgage production revenue was $880 million, up $576 million,
reflecting the impact of an increase in mortgage loan originations
and the classification of certain loan origination costs as expense
(loan origination costs previously netted against revenue commenced
being recorded as an expense in the first quarter of 2007 due to the
adoption of SFAS 159). These benefits were offset partially by mark-
downs of $241 million on the mortgage warehouse and pipeline. Net
mortgage servicing revenue, which includes loan servicing revenue,
MSR risk management results and other changes in fair value, was
$1.2 billion, compared with $314 million in the prior year. Loan serv-
icing revenue of $2.3 billion increased $195 million on 17% growth
in third-party loans serviced. MSR risk management results were pos-
itive $411 million compared with negative $385 million in the prior
year. Other changes in fair value of the MSR asset were negative
$1.5 billion, compared with negative $1.4 billion in the prior year.
The provision for credit losses was $2.5 billion, compared with $447
million in the prior year. The increase in the provision was due to the
home equity and subprime mortgage portfolios (see Retail Financial
Services discussion of the provision for credit losses for further detail).
Noninterest expense was $3.7 billion, an increase of $479 million, or
15%. The increase reflected the classification of certain loan origina-
tion costs due to the adoption of SFAS 159; higher servicing costs
due to increased delinquencies and defaults; higher production
expense due to growth in originations; and increased depreciation
expense on owned automobiles subject to operating leases. These
increases were offset partially by the sale of the insurance business.
Selected metrics
Year ended December 31,
(in billions) 2008 2007 2006
Business metrics
Selected ending balances
Loans excluding purchased credit-impaired
End-of-period loans owned
Home equity $ 114.3 $ 94.8 $ 85.7
Prime mortgage 65.2 34.0 46.5
Subprime mortgage 15.3 15.5 13.2
Option ARMs 9.0 ——
Student loans 15.9 11.0 10.3
Auto 42.6 42.3 41.0
Other 1.3 2.1 2.8
Total end-of-period loans $ 263.6 $ 199.7 $199.5
Average loans owned
Home equity $ 99.9 $ 90.4 $ 78.3
Prime mortgage 45.0 30.4 43.3
Subprime mortgage 15.3 12.7 15.4
Option ARMs 2.3 ——
Student loans 13.6 10.5 8.3
Auto 43.8 41.1 42.7
Other loans 1.1 2.3 2.4
Total average loans $ 221.0 $ 187.4 $190.4
Year ended December 31,
(in billions) 2008 2007 2006
Purchased credit-impaired loans(a)
End-of-period loans owned
Home equity $ 28.6 $— $—
Prime mortgage 21.8 ——
Subprime mortgage 6.8 ——
Option ARMs 31.6 ——
Total end-of-period loans $ 88.8 $— $—
Average loans owned
Home equity $7.1 $— $—
Prime mortgage 5.4 ——
Subprime mortgage 1.7 ——
Option ARMs 8.0 ——
Total average loans $ 22.2 $— $—