JP Morgan Chase 2009 Annual Report Download - page 171

JPMorgan Chase & Co./2009 Annual Report 169
Mortgage-related exposures carried at fair value
The following table provides a summary of the Firm’s mortgage-related exposures, including the impact of risk management activities.
These exposures include all mortgage-related securities and loans carried at fair value regardless of their classification within the fair value
hierarchy, and that are carried at fair value through earnings or at the lower of cost or fair value. The table excludes securities held in the
available-for-sale portfolio, which are reported on page 170 of this Note.
Exposure as of
December 31, 2009
Exposure as of
December 31, 2008 Net gains/(losses)(e)
(in millions) Gross
Net of risk
management
activities(d) Gross
Net of risk
management
activities(d)
Reported
in income –
year ended
December 31,
2009
Reported
in income –
year ended
December 31,
2008
U.S. Residential Mortgage: (a)(b)(c)
Prime $ 3,482 $ 3,482 $ 4,612 $ 4,612
Alt-A 3,030 3,030 3,934 3,917
6,512 6,512 8,546 8,529 $ 537 $ (4,093 )
Subprime 569 137 941 (28) (76) (369
)
)
Non-U.S. Residential(c) 1,702 1,321 1,591 951 86 (292 )
Commercial Mortgage:
Securities 2,337 1,898 2,836 1,438 257 (792
)
Loans 2,699 2,035 4,338 2,179 (333) (752
)
(a) Excluded at December 31, 2009 and 2008, are certain mortgages and mortgage-related assets that are carried at fair value and recorded in trading assets, such as: (i) U.S.
government agency securities that are liquid and of high credit quality of $41.7 billion and $58.9 billion, respectively; (ii) conforming mortgage loans originated with the
intent to sell to U.S. government agencies of $11.1 billion and $6.2 billion, respectively; and (iii) reverse mortgages of $4.5 billion and $4.3 billion, respectively, for which
the principal risk is mortality risk. Also excluded are MSRs, which are reported in Note 17 on pages 222–225 of this Annual Report.
(b) Excluded certain mortgage-related financing transactions, which are collateralized by mortgage-related assets, of $4.1 billion and $5.7 billion at December 31, 2009
and 2008, respectively. These financing transactions are excluded from the table, as they are accounted for on an accrual basis of accounting. For certain financings
deemed to be impaired, impairment is measured and recognized based on the fair value of the collateral. Of these financing transactions, $136 million and $1.2 billion
were considered impaired at December 31, 2009 and 2008, respectively.
(c) Total residential mortgage exposures at December 31, 2009 and 2008, include: (i) securities of $3.4 billion and $4.0 billion, respectively; (ii) loans carried at fair value
or the lower of cost or fair value of $5.0 billion and $5.9 billion, respectively; and (iii) forward purchase commitments included in derivative receivables of $358 million
and $1.2 billion, respectively.
(d) Amounts reflect the effects of derivatives used to manage the credit risk of the gross exposures arising from cash-based instruments. The amounts are presented on a
bond- or loan-equivalent (notional) basis. Derivatives are excluded from the gross exposure, as they are principally used for risk management purposes.
(e) Net gains and losses include all revenue related to the positions (i.e., interest income, changes in fair value of the assets, changes in fair value of the related risk man-
agement positions, and interest expense related to the liabilities funding those positions).
Residential mortgages
Classification and Valuation – Residential mortgage loans and MBS
are classified within level 2 or level 3 of the valuation hierarchy,
depending on the level of liquidity and activity in the markets for a
particular product. Level 3 assets include nonagency residential
whole loans and subordinated nonagency residential MBS. Prod-
ucts that continue to have reliable price transparency as evidenced
by consistent market transactions, such as senior nonagency
securities, as well as agency securities, are classified in level 2.
For those products classified within level 2 of the valuation hierar-
chy, the Firm estimates the value of such instruments using a
combination of observed transaction prices, independent pricing
services and relevant broker quotes. Consideration is given to the
nature of the quotes (e.g., indicative or firm) and the relationship
of recently evidenced market activity to the prices provided from
independent pricing services.
When relevant market activity is not occurring or is limited, the fair
value is estimated as follows:
Residential mortgage loans – Fair value of residential mortgage
loans is estimated by projecting the expected cash flows and
discounting those cash flows at a rate reflective of current market
liquidity. To estimate the projected cash flows (inclusive of as-
sumptions of prepayment, default rates and loss severity), specific
consideration is given to both borrower-specific and other market
factors, including, but not limited to: the borrower’s FICO score;
the type of collateral supporting the loan; an estimate of the
current value of the collateral supporting the loan; the level of
documentation for the loan; and market-derived expectations for
home price appreciation or depreciation in the respective geogra-
phy of the borrower.
Residential mortgage-backed securities – Fair value of residential
MBS is estimated considering the value of the collateral and the
specific attributes of the securities held by the Firm. The value of
the collateral pool supporting the securities is analyzed using the
same techniques and factors described above for residential mort-
gage loans, albeit in a more aggregated manner across the pool.
For example, average FICO scores, average delinquency rates,
average loss severities and prepayment rates, among other met-
rics, may be evaluated. In addition, as each securitization vehicle
distributes cash in a manner or order that is predetermined at the
inception of the vehicle, the priority in which each particular MBS
is allocated cash flows, and the level of credit enhancement that is
in place to support those cash flows, are key considerations in
deriving the value of residential MBS. Finally, the risk premium that
investors demand for securitized products in the current market is
factored into the valuation. To benchmark its valuations, the Firm
looks to transactions for similar instruments and utilizes independ-