JP Morgan Chase 2010 Annual Report Download - page 101

JPMorgan Chase & Co./2010 Annual Report
101
When a loan was originated by a third-party correspondent, the
Firm typically has the right to seek a recovery of related repurchase
losses from the correspondent originator. Correspondent-originated
loans comprise approximately 40 percent of loans underlying
outstanding repurchase demands, excluding those related to
Washington Mutual. The Firm experienced a decrease in third-party
recoveries from late 2009 into 2010. However, the actual third-
party recovery rate may vary from quarter to quarter based upon
the underlying mix of correspondents (e.g., active, inactive, out-of-
business) from which recoveries are being sought.
The Firm is engaged in discussions with various mortgage insurers
on their rights and practices of rescinding mortgage insurance
coverage. The Firm has entered into agreements with two
mortgage insurers to resolve their claims on certain portfolios for
which the Firm is a servicer. The impact of these agreements is
reflected in the repurchase liability and the disclosed outstanding
mortgage insurance rescission notices as of December 31, 2010.
Substantially all of the estimates and assumptions underlying the
Firm’s methodology for computing its recorded repurchase
liability—including factors such as the amount of probable future
demands from purchasers (which is in part based on historical
experience), the ability of the Firm to cure identified defects, the
severity of loss upon repurchase or foreclosure and recoveries from
third parties—require application of a significant level of
management judgment. Estimating the repurchase liability is further
complicated by limited and rapidly changing historical data and
uncertainty surrounding numerous external factors, including: (i)
economic factors (e.g., further declines in home prices and changes
in borrower behavior may lead to increases in the number of
defaults, the severity of losses, or both), and (ii) the level of future
demands, which is dependent, in part, on actions taken by third
parties, such as the GSEs and mortgage insurers. While the Firm
uses the best information available to it in estimating its repurchase
liability, the estimation process is inherently uncertain, imprecise
and potentially volatile as additional information is obtained and
external factors continue to evolve.
The following table summarizes the change in the repurchase
liability for each of the periods presented.
Summary of changes in repurchase liability
Year ended December 31,
(in millions) 2010 2009 2008
Repurchase liability at
beginning of period $ 1,705 $ 1,093 $ 15
Realized losses
(a)
(1,423) (1,253)
(
c
)
(155)
Provision for repurchase losses
3,003 1,865 1,233(d)
Repurchase liability at end
of period $ 3,285(b) $ 1,705 $ 1,093
(a) Includes principal losses and accrued interest on repurchased loans, “make-
whole” settlements, settlements with claimants, and certain related expense.
For the years ended December 31, 2010, 2009 and 2008, make-whole
settlements were $632 million, $277 million and $34 million, respectively.
(b) Includes $190 million at December 31, 2010, related to future demands on
loans sold by Washington Mutual to the GSEs.
(c) Includes the Firm’s resolution of certain current and future repurchase
demands for certain loans sold by Washington Mutual. The unpaid principal
balance of loans related to this resolution is not included in the table below,
which summarizes the unpaid principal balance of repurchased loans.
(d) Includes a repurchase liability assumed for certain loans sold by Washington
Mutual; this assumed liability was reported as a reduction of the extraordinary
gain rather than as a charge to the provision for repurchase losses.
The following table summarizes the total unpaid principal balance
of repurchases during the periods indicated.
Unpaid principal balance of loan repurchases(a)
Year ended December 31,
(in millions) 2010 2009 2008
Ginnie Mae
(b)
$ 8,717 $ 6,966 $ 4,
452
GSEs and other
(c)
(d)
1,790 1,019 587
Total
$
10,507
$ 7,985 $ 5,039
(a) Excludes mortgage insurers. While the rescission of mortgage insurance may
ultimately trigger a repurchase demand, the mortgage insurers themselves do
not present repurchase demands to the Firm.
(b) In substantially all cases, these repurchases represent the Firm’s voluntary
repurchase of certain delinquent loans from loan pools or packages as
permitted by Ginnie Mae guidelines (i.e., they do not result from repurchase
demands due to breaches of representations and warranties). In certain cases,
the Firm repurchases these delinquent loans as it continues to service them
and/or manage the foreclosure process in accordance with applicable
requirements of Ginnie Mae, the FHA, RHA and/or the VA.
(c) Predominantly all of the repurchases related to the GSEs.
(d) Nonaccrual loans held-for-investment included $354 million and $218 million
at December 31, 2010 and 2009, respectively, of loans repurchased as a
result of breaches of representations and warranties.