JP Morgan Chase 2010 Annual Report Download - page 136

Management’s discussion and analysis
136 JPMorgan Chase & Co./2010 Annual Report
As a result of these foreclosure process issues, the Firm has under-
taken remedial actions to ensure that it satisfies all procedural
requirements relating to mortgage foreclosures. These actions
include:
• A complete review of the foreclosure document execution poli-
cies and procedures;
• The creation of model affidavits that will comply with all local
law requirements and be used in every case;
• Implementation of enhanced procedures designed to ensure that
employees who execute affidavits personally verify their contents
and that the affidavits are executed only in the physical presence
of a licensed notary;
• Extensive training for all personnel who will have responsibility
for document execution going forward and certification of those
personnel by outside counsel;
• Implementation of a rigorous quality control double-check re-
view of affidavits completed by the Firm’s employees; and
• Review and verification of our revised procedures by outside
experts.
As of January 2011, the Firm has resumed initiation of new foreclo-
sure proceedings in nearly all states in which it had previously
suspended such proceedings.
The following table presents information as of December 31, 2010
and 2009, about the Firm’s nonperforming consumer assets, ex-
cluding credit card.
Nonperforming assets(a)
December 31,
(in millions) 2010 2009
Nonaccrual loans
(
b
)
Home equity – senior lien
$
479 $ 477
Home equity – junior lien 784 1,188
Prime mortgage, including option ARMs 4,320 4,667
Subprime mortgage 2,210 3,248
Auto 141 177
Business banking 832 826
Student and other 67 74
Total nonaccrual loans 8,833 10,657
Assets acquired in loan satisfactions
Real estate owned 1,294 1,156
Other 67 99
Total assets acquired in loan satisfactions 1,361 1,255
Total nonperforming assets
$
10,194 $ 11,912
(a) At December 31, 2010 and 2009, nonperforming assets excluded: (1) mortgage
loans insured by U.S. government agencies of $10.5 billion and $9.0 billion, re-
spectively, that are 90 days past due and accruing at the guaranteed reimburse-
ment rate; (2) real estate owned insured by U.S. government agencies of $1.9
billion and $579 million, respectively; and (3) student loans that are 90 days past
due and still accruing, which are insured by U.S. government agencies under the
FFELP, of $625 million and $542 million, respectively. These amounts are ex-
cluded as reimbursement of insured amounts is proceeding normally.
(b) Excludes PCI loans that were acquired as part of the Washington Mutual transac-
tion, which are accounted for on a pool basis. Since each pool is accounted for as
a single asset with a single composite interest rate and an aggregate expectation
of cash flows, the past-due status of the pools, or that of individual loans within
the pools, is not meaningful. Because the Firm is recognizing interest income on
each pool of loans, they are all considered to be performing.
Nonaccrual loans: Total consumer nonaccrual loans, excluding
credit card, were $8.8 billion, compared with $10.7 billion at
December 31, 2009. Nonaccrual loans have stabilized, but re-
mained at elevated levels. The increase in loan modification activi-
ties is expected to continue to result in elevated levels of
nonaccrual loans in the residential real estate portfolios as a result
of both redefault of modified loans as well as the Firm’s policy that
modified loans remain in nonaccrual status until repayment is
reasonably assured and the borrower has made a minimum of six
payments under the new terms. Nonaccrual loans in the residential
real estate portfolio totaled $7.8 billion at December 31, 2010, of
which 71% were greater than 150 days past due; this compared
with nonaccrual residential real estate loans of $9.6 billion at
December 31, 2009, of which 64% were greater than 150 days
past due. Modified residential real estate loans of $1.3 billion and
$920 million at December 31, 2010 and 2009, respectively, were
classified as nonaccrual loans. Of these modified residential real
estate loans, $580 million and $256 million had yet to make six
payments under their modified terms at December 31, 2010 and
2009, respectively, with the remaining nonaccrual modified loans
having redefaulted. In the aggregate, the unpaid principal balance
of residential real estate loans greater than 150 days past due was
charged down by approximately 46% and 36% to estimated collat-
eral value at December 31, 2010 and 2009, respectively.
Real estate owned (“REO”): As part of the residential real
estate foreclosure process, loans are written down to the fair value
of the underlying real estate asset, less costs to sell, at acquisition.
Typically, any further gains or losses on REO assets are recorded as
part of other income. In those instances where the Firm gains
ownership and possession of individual properties at the comple-
tion of the foreclosure process, these REO assets are managed for
prompt sale and disposition at the best possible economic value.
Operating expense, such as real estate taxes and maintenance, are
charged to other expense. REO assets, excluding those insured by
U.S. government agencies, increased by $138 million from Decem-
ber 31, 2009 to $1.3 billion, primarily related to foreclosures of
non-PCI loans. It is anticipated that REO assets will continue to
increase over the next several quarters, as loans moving through
the foreclosure process are expected to increase.