JP Morgan Chase 2014 Annual Report Download - page 116

Management’s discussion and analysis
114 JPMorgan Chase & Co./2014 Annual Report
(d) Includes accrued interest and fees net of an allowance for the uncollectible portion of accrued interest and fee income.
(e) Predominantly represents prime mortgage loans held-for-sale.
(f) At December 31, 2014 and 2013, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $7.8 billion and $8.4 billion,
respectively, that are 90 or more days past due; and (2) student loans insured by U.S. government agencies under the FFELP of $367 million and $428
million, respectively, that are 90 or more days past due. These amounts have been excluded from nonaccrual loans based upon the government guarantee. In
addition, the Firm’s policy is generally to exempt credit card loans from being placed on nonaccrual status as permitted by regulatory guidance.
(g) Excludes PCI loans. The Firm is recognizing interest income on each pool of PCI loans as they are all performing.
(h) Net charge-offs and net charge-off rates excluded $533 million and $53 million of write-offs of prime mortgages in the PCI portfolio for the years ended
December 31, 2014 and 2013. These write-offs decreased the allowance for loan losses for PCI loans. See Allowance for Credit Losses on pages 128–130 for
further details.
(i) Average consumer loans held-for-sale were $917 million and $209 million, respectively, for the years ended December 31, 2014 and 2013. These amounts
were excluded when calculating net charge-off rates.
Consumer, excluding credit card
Portfolio analysis
Consumer loan balances increased during the year ended
December 31, 2014, due to prime mortgage, business
banking and auto loan originations, partially offset by
paydowns and the charge-off or liquidation of delinquent
loans. Credit performance has improved across most
portfolios but delinquent residential real estate loans and
home equity charge-offs remain elevated compared with
pre-recessionary levels.
In the following discussion of loan and lending-related
categories, PCI loans are excluded from individual loan
product discussions and are addressed separately below.
For further information about the Firm’s consumer
portfolio, including information about delinquencies, loan
modifications and other credit quality indicators, see
Note 14.
Home equity: The home equity portfolio declined from
December 31, 2013 primarily reflecting loan paydowns and
charge-offs. Early-stage delinquencies showed improvement
from December 31, 2013. Late-stage delinquencies
continue to be elevated as improvement in the number of
loans becoming severely delinquent was offset by a higher
number of loans remaining in late-stage delinquency due to
higher average carrying values on these delinquent loans,
reflecting improving collateral values. Senior lien
nonaccrual loans were flat compared with the prior year
while junior lien nonaccrual loans decreased in 2014. Net
charge-offs for both senior and junior lien home equity
loans declined when compared with the prior year as a
result of improvement in home prices and delinquencies.
Approximately 15% of the Firm’s home equity portfolio
consists of home equity loans (“HELOANs”) and the
remainder consists of home equity lines of credit
(“HELOCs”). HELOANs are generally fixed-rate, closed-end,
amortizing loans, with terms ranging from 3–30 years.
Approximately half of the HELOANs are senior liens and the
remainder are junior liens. In general, HELOCs originated by
the Firm are revolving loans for a 10-year period, after
which time the HELOC recasts into a loan with a 20-year
amortization period. At the time of origination, the
borrower typically selects one of two minimum payment
options that will generally remain in effect during the
revolving period: a monthly payment of 1% of the
outstanding balance, or interest-only payments based on a
variable index (typically Prime). HELOCs originated by
Washington Mutual were generally revolving loans for a 10-
year period, after which time the HELOC converts to an
interest-only loan with a balloon payment at the end of the
loan’s term.
The unpaid principal balance of non-PCI HELOCs
outstanding was $47 billion at December 31, 2014. Of the
$47 billion, approximately $29 billion have recently recast
or are scheduled to recast from interest-only to fully
amortizing payments, with $3 billion having recast in 2014;
$6 billion, $7 billion, and $6 billion are scheduled to recast
in 2015, 2016, and 2017, respectively; and $7 billion is
scheduled to recast after 2017. However, of the total $26
billion still remaining to recast, $18 billion are expected to
actually recast; and the remaining $8 billion represents
loans to borrowers who are expected either to pre-pay or
charge-off prior to recast. In the third quarter of 2014, the
Firm refined its approach for estimating the number of
HELOCs expected to voluntarily pre-pay prior to recast.
Based on the refined methodology, the number of loans
expected to pre-pay declined, resulting in an increase in the
number of loans expected to recast. The Firm has
considered this payment recast risk in its allowance for loan
losses based upon the estimated amount of payment shock
(i.e., the excess of the fully-amortizing payment over the
interest-only payment in effect prior to recast) expected to
occur at the payment recast date, along with the
corresponding estimated probability of default and loss
severity assumptions. Certain factors, such as future
developments in both unemployment rates and home
prices, could have a significant impact on the performance
of these loans.
The Firm manages the risk of HELOCs during their revolving
period by closing or reducing the undrawn line to the extent
permitted by law when borrowers are exhibiting a material
deterioration in their credit risk profile. The Firm will
continue to evaluate both the near-term and longer-term
repricing and recast risks inherent in its HELOC portfolio to
ensure that changes in the Firm’s estimate of incurred
losses are appropriately considered in the allowance for
loan losses and that the Firm’s account management
practices are appropriate given the portfolio’s risk profile.
High-risk seconds are loans where the borrower has a first
mortgage loan that is either delinquent or has been
modified. Such loans are considered to pose a higher risk of
default than junior lien loans for which the senior lien is
neither delinquent nor modified. At December 31, 2014,
the Firm estimated that its home equity portfolio contained
approximately $1.8 billion of current high-risk seconds,
compared with $2.3 billion at December 31, 2013. The
Firm estimates the balance of its total exposure to high-risk
seconds on a quarterly basis using internal data and loan