JP Morgan Chase 2008 Annual Report Download - page 82

Management’s discussion and analysis
80 JPMorgan Chase & Co./ 2008 Annual Report
Special-purpose entities revenue
The following table summarizes certain revenue information related
to consolidated and nonconsolidated VIEs and QSPEs with which the
Firm has significant involvement. The revenue reported in the table
below primarily represents contractual servicing and credit fee
income (i.e., for income from acting as administrator, structurer, liq-
uidity provider). It does not include mark-to-market gains and losses
from changes in the fair value of trading positions (such as derivative
transactions) entered into with VIEs. Those gains and losses are
recorded in principal transactions revenue.
Revenue from VIEs and QSPEs
Year ended December 31,
(in millions) 2008 2007 2006
VIEs:(a)
Multi-seller conduits $ 314 $ 187(b) $ 160
Investor intermediation 18 33 49
Total VIEs 332 220 209
QSPEs(c) 1,746 1,420 1,131
Total $ 2,078 $ 1,640 $1,340
(a) Includes revenue associated with consolidated VIEs and significant nonconsolidated
VIEs.
(b) Excludes the markdown on subprime CDO assets that was recorded in principal
transactions revenue in 2007.
(c) Excludes servicing revenue from loans sold to and securitized by third parties. Prior
period amounts have been revised to conform to the current period presentation.
American Securitization Forum subprime adjustable rate
mortgage loans modifications
In December 2007, the American Securitization Forum (“ASF”) issued
the “Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans” (“the
Framework”).The Framework provides guidance for servicers to
streamline evaluation procedures of borrowers with certain subprime
adjustable rate mortgage (“ARM”) loans to more efficiently provide
modification of such loans with terms that are more appropriate for
the individual needs of such borrowers. The Framework applies to all
first-lien subprime ARM loans that have a fixed rate of interest for an
initial period of 36 months or less; are included in securitized pools;
were originated between January 1, 2005, and July 31, 2007; and
have an initial interest rate reset date between January 1, 2008, and
July 31, 2010. The Framework categorizes the population of ASF
Framework Loans into three segments. Segment 1 includes loans
where the borrower is current and likely to be able to refinance into
any available mortgage product. Segment 2 includes loans where the
borrower is current, unlikely to be able to refinance into any readily
available mortgage industry product and meets certain defined crite-
ria. Segment 3 includes loans where the borrower is not current, as
defined, and does not meet the criteria for Segments 1 or 2.
JPMorgan Chase adopted the Framework during the first quarter of
2008. For those AFS Framework Loans serviced by the Firm and
owned by Firm-sponsored QSPEs, the Firm modified principal amounts
of $1.7 billion of Segment 2 subprime mortgages during the year
ended December 31, 2008. The following table presents selected
information relating to the principal amount of Segment 3 loans for
the year ended December 31, 2008, including those that have been
modified, subjected to other loss mitigation activities or have been
prepaid by the borrower.
Year ended December 31, 2008 (in millions)
Loan modifications $ 2,384
Other loss mitigation activities 865
Prepayments 219
For additional discussion of the Framework, see Note 16 on page
188 of this Annual Report.
Off-balance sheet lending-related financial
instruments and guarantees
JPMorgan Chase utilizes lending-related financial instruments (e.g.,
commitments and guarantees) to meet the financing needs of its
customers. The contractual amount of these financial instruments
represents the maximum possible credit risk should the counterparty
draw upon the commitment or the Firm be required to fulfill its obli-
gation under the guarantee, and the counterparty subsequently fail
to perform according to the terms of the contract. These commit-
ments and guarantees historically expire without being drawn and
even higher proportions expire without a default. As a result, the
total contractual amount of these instruments is not, in the Firm’s
view, representative of its actual future credit exposure or funding
requirements. Further, certain commitments, primarily related to con-
sumer financings, are cancelable, upon notice, at the option of the
Firm. For further discussion of lending-related commitments and
guarantees and the Firm’s accounting for them, see lending-related
commitments in Credit Risk Management on page 102 and Note 33
on pages 218–222 of this Annual Report.
Contractual cash obligations
In the normal course of business, the Firm enters into various con-
tractual obligations that may require future cash payments.
Commitments for future cash expenditures primarily include contracts
to purchase future services and capital expenditures related to real
estate–related obligations and equipment.
The accompanying table summarizes, by remaining maturity,
JPMorgan Chase’s off-balance sheet lending-related financial instru-
ments and significant contractual cash obligations at December 31,
2008. Contractual purchases and capital expenditures in the table
below reflect the minimum contractual obligation under legally
enforceable contracts with terms that are both fixed and deter-
minable. Excluded from the following table are a number of obliga-
tions to be settled in cash, primarily in under one year. These obliga-
tions are reflected on the Firm’s Consolidated Balance Sheets and
include federal funds purchased and securities loaned or sold under
repurchase agreements; commercial paper; other borrowed funds;
purchases of debt and equity instruments; derivative payables; and
certain purchases of instruments that resulted in settlement failures.
Also excluded are contingent payments associated with certain
acquisitions that could not be estimated. For discussion regarding
long-term debt and trust preferred capital debt securities, see Note
23 on pages 203–204 of this Annual Report. For discussion regard-
ing operating leases, see Note 31 on page 213 of this Annual
Report.