JP Morgan Chase 2014 Annual Report Download - page 274

Notes to consolidated financial statements
272 JPMorgan Chase & Co./2014 Annual Report
values, although precise conclusions generally cannot be
drawn due to the differences that naturally exist between
the Firm’s businesses and competitor institutions.
Management also takes into consideration a comparison
between the aggregate fair value of the Firm’s reporting
units and JPMorgan Chase’s market capitalization. In
evaluating this comparison, management considers several
factors, including (a) a control premium that would exist in
a market transaction, (b) factors related to the level of
execution risk that would exist at the firmwide level that do
not exist at the reporting unit level and (c) short-term
market volatility and other factors that do not directly
affect the value of individual reporting units.
Deterioration in economic market conditions, increased
estimates of the effects of regulatory or legislative changes,
or additional regulatory or legislative changes may result in
declines in projected business performance beyond
management’s current expectations. For example, in the
Firm’s Mortgage Banking business, such declines could
result from increases in primary mortgage interest rates,
lower mortgage origination volume, higher costs to resolve
foreclosure-related matters or from deterioration in
economic conditions, including decreases in home prices
that result in increased credit losses. Declines in business
performance, increases in equity capital requirements, or
increases in the estimated cost of equity, could cause the
estimated fair values of the Firm’s reporting units or their
associated goodwill to decline in the future, which could
result in a material impairment charge to earnings in a
future period related to some portion of the associated
goodwill.
Mortgage servicing rights
Mortgage servicing rights represent the fair value of
expected future cash flows for performing servicing
activities for others. The fair value considers estimated
future servicing fees and ancillary revenue, offset by
estimated costs to service the loans, and generally declines
over time as net servicing cash flows are received,
effectively amortizing the MSR asset against contractual
servicing and ancillary fee income. MSRs are either
purchased from third parties or recognized upon sale or
securitization of mortgage loans if servicing is retained.
As permitted by U.S. GAAP, the Firm has elected to account
for its MSRs at fair value. The Firm treats its MSRs as a
single class of servicing assets based on the availability of
market inputs used to measure the fair value of its MSR
asset and its treatment of MSRs as one aggregate pool for
risk management purposes. The Firm estimates the fair
value of MSRs using an option-adjusted spread (“OAS”)
model, which projects MSR cash flows over multiple interest
rate scenarios in conjunction with the Firm’s prepayment
model, and then discounts these cash flows at risk-adjusted
rates. The model considers portfolio characteristics,
contractually specified servicing fees, prepayment
assumptions, delinquency rates, costs to service, late
charges and other ancillary revenue, and other economic
factors. The Firm compares fair value estimates and
assumptions to observable market data where available,
and also considers recent market activity and actual
portfolio experience.