JP Morgan Chase 2010 Annual Report Download - page 134

Management’s discussion and analysis
134 JPMorgan Chase & Co./2010 Annual Report
(b) Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated based on home
valuation models utilizing nationally recognized home price index valuation estimates. Prior period amounts have been revised to conform to the current period presen-
tation.
(c) Represents current estimated combined LTV, which considers all available lien positions related to the property. All other products are presented without consideration
of subordinate liens on the property.
(d) Carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition.
(e) At December 31, 2010, and 2009, the ratios of carrying value to current estimated collateral value are net of the allowance for loan losses of $1.6 billion and zero for
home equity, respectively, $1.8 billion and $1.1 billion for prime mortgage, respectively, $98 million and zero for subprime mortgage, respectively, and $1.5 billion and
$491 million for option ARMs, respectively.
PCI loans in the states of California and Florida represented 53% and
10%, respectively, of total PCI loans at December 31, 2010, com-
pared with 54% and 11%, respectively, at December 31, 2009. The
current estimated average LTV ratios were 118% and 135% for
California and Florida loans, respectively, at December 31, 2010,
compared with 114% and 131%, respectively, at December 31,
2009. Continued pressure on housing prices in California and Florida
have contributed negatively to both the current estimated average
LTV ratio and the ratio of carrying value to current collateral value for
loans in the PCI portfolio. For the PCI portfolio, 63% had a current
estimated LTV ratio greater than 100%, and 31% of the PCI portfolio
had a current estimated LTV ratio greater than 125% at December
31, 2010; this compared with 59% of the PCI portfolio with a current
estimated LTV ratio greater than 100%, and 28% with a current
estimated LTV ratio greater than 125%, at December 31, 2009.
The carrying value of PCI loans is below the current estimated collat-
eral value of the loans and, accordingly, the ultimate performance of
this portfolio is highly dependent on borrowers’ behavior and ongoing
ability and willingness to continue to make payments on homes with
negative equity, as well as on the cost of alternative housing. For
further information on the geographic composition and current
estimated LTVs of residential real estate – non PCI and PCI loans, see
Note 14 on pages 220–238 of this Annual Report.
Loan modification activities
For additional information about consumer loan modification
activities, including consumer loan modifications accounted for as
troubled debt restructurings, see Note 14 on pages 220–238 of this
Annual Report.
Residential real estate loans: For both the Firm’s on-balance
sheet loans and loans serviced for others, more than 1,038,000
mortgage modifications have been offered to borrowers and ap-
proximately 318,000 have been approved since the beginning of
2009. Of these, approximately 285,000 have achieved permanent
modification as of December 31, 2010. Of the remaining 720,000
modifications, 34% are in a trial period or still being reviewed for a
modification, while 66% have dropped out of the modification
program or otherwise were not eligible for final modification.
The Firm is participating in the U.S. Treasury’s MHA programs and is
continuing to expand its other loss-mitigation efforts for financially
distressed borrowers who do not qualify for the U.S. Treasury’s pro-
grams. The MHA programs include the Home Affordable Modification
Program (“HAMP”) and the Second Lien Modification Program
(“2MP”); these programs mandate standard modification terms
across the industry and provide incentives to borrowers, servicers and
investors who participate. The Firm completed its first permanent
modifications under HAMP in September 2009. Under 2MP, which
the Firm implemented in May 2010, homeowners are offered a way
to modify their second mortgage to make it more affordable when
their first mortgage has been modified under HAMP.
The Firm’s other loss-mitigation programs for troubled borrowers
who do not qualify for HAMP include the traditional modification
programs offered by the GSE’s and Ginnie Mae, as well as the
Firm’s proprietary modification programs, which include similar
concessions to those offered under HAMP but with expanded
eligibility criteria. In addition, the Firm has offered modification
programs targeted specifically to borrowers with higher-risk mort-
gage products.
MHA, as well as the Firm’s other loss-mitigation programs, gener-
ally provide various concessions to financially troubled borrowers,
including, but not limited to, interest rate reductions, term or
payment extensions, and deferral of principal payments that would
have otherwise been required under the terms of the original
agreement. For the 54,500 on–balance sheet loans modified under
HAMP and the Firm’s other loss-mitigation programs since July 1,
2009, 55% of permanent loan modifications have included interest
rate reductions, 49% have included term or payment extensions,
9% have included principal deferment and 22% have included
principal forgiveness. Principal forgiveness has been limited to a
specific modification program for option ARMs. The sum of the
percentages of the types of loan modifications exceeds 100%
because, in some cases, the modification of an individual loan
includes more than one type of concession.
Generally, borrowers must make at least three payments under the
revised contractual terms during a trial modification and be suc-
cessfully re-underwritten with income verification before a mort-
gage or home equity loan can be permanently modified. When the
Firm modifies home equity lines of credit, future lending commit-
ments related to the modified loans are canceled as part of the
terms of the modification.
The ultimate success of these modification programs and their
impact on reducing credit losses remains uncertain given the short
period of time since modification. The primary indicator used by
management to monitor the success of these programs is the rate
at which the modified loans redefault. Modification redefault rates
are affected by a number of factors, including the type of loan
modified, the borrower’s overall ability and willingness to repay the
modified loan and other macroeconomic factors. Reduction in
payment size for a borrower has shown to be the most significant
driver in improving redefault rates. Modifications completed after
July 1, 2009, whether under HAMP or under the Firm’s other
modification programs, differ from modifications completed under
prior programs in that they are generally fully underwritten after a