JP Morgan Chase 2014 Annual Report Download - page 275

JPMorgan Chase & Co./2014 Annual Report 273
The fair value of MSRs is sensitive to changes in interest
rates, including their effect on prepayment speeds. MSRs
typically decrease in value when interest rates decline
because declining interest rates tend to increase
prepayments and therefore reduce the expected life of the
net servicing cash flows that comprise the MSR asset.
Conversely, securities (e.g., mortgage-backed securities),
principal-only certificates and certain derivatives (i.e.,
those for which the Firm receives fixed-rate interest
payments) increase in value when interest rates decline.
JPMorgan Chase uses combinations of derivatives and
securities to manage changes in the fair value of MSRs. The
intent is to offset any interest-rate related changes in the
fair value of MSRs with changes in the fair value of the
related risk management instruments.
The following table summarizes MSR activity for the years ended December 31, 2014, 2013 and 2012.
As of or for the year ended December 31, (in millions, except where otherwise noted) 2014 2013 2012
Fair value at beginning of period $ 9,614 $ 7,614 $ 7,223
MSR activity:
Originations of MSRs 757 2,214 2,376
Purchase of MSRs 11 1 457
Disposition of MSRs(a) (209) (725) (579)
Net additions 559 1,490 2,254
Changes due to collection/realization of expected cash flows(b) (911) (1,102) (1,228)
Changes in valuation due to inputs and assumptions:
Changes due to market interest rates and other(c) (1,608) 2,122 (589)
Changes in valuation due to other inputs and assumptions:
Projected cash flows (e.g., cost to service)(d) 133 109 (452)
Discount rates (459) (h) (78) (98)
Prepayment model changes and other(e) 108 (541) 504
Total changes in valuation due to other inputs and assumptions (218) (510) (46)
Total changes in valuation due to inputs and assumptions(b) $ (1,826) $ 1,612 $ (635)
Fair value at December 31,(f) $ 7,436 $ 9,614 $ 7,614
Change in unrealized gains/(losses) included in income related to MSRs
held at December 31, $ (1,826) $ 1,612 $ (635)
Contractual service fees, late fees and other ancillary fees included in income $ 2,884 $ 3,309 $ 3,783
Third-party mortgage loans serviced at December 31, (in billions) $ 756 $ 822 $ 867
Servicer advances, net of an allowance for uncollectible amounts, at December 31, (in billions)(g) $ 8.5 $ 9.6 $ 10.9
(a) Predominantly represents excess mortgage servicing rights transferred to agency-sponsored trusts in exchange for stripped mortgage backed securities (“SMBS”).
In each transaction, a portion of the SMBS was acquired by third parties at the transaction date; the Firm acquired and has retained the remaining balance of those
SMBS as trading securities. Also includes sales of MSRs in 2013 and 2012.
(b) Included changes related to commercial real estate of $(7) million, $(5) million and $(8) million for the years ended December 31, 2014, 2013 and 2012,
respectively.
(c) Represents both the impact of changes in estimated future prepayments due to changes in market interest rates, and the difference between actual and expected
prepayments.
(d) For the year ended December 31, 2013, the increase was driven by the inclusion in the MSR valuation model of servicing fees receivable on certain delinquent
loans.
(e) Represents changes in prepayments other than those attributable to changes in market interest rates. For the year ended December 31, 2013, the decrease was
driven by changes in the inputs and assumptions used to derive prepayment speeds, primarily increases in home prices.
(f) Included $11 million, $18 million and $23 million related to commercial real estate at December 31, 2014, 2013, and 2012, respectively.
(g) Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest to a trust, taxes and insurance), which will generally be reimbursed within a
short period of time after the advance from future cash flows from the trust or the underlying loans. The Firm’s credit risk associated with these advances is minimal
because reimbursement of the advances is typically senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment to investors if
the collateral is insufficient to cover the advance. However, certain of these servicer advances may not be recoverable if they were not made in accordance with
applicable rules and agreements.
(h) For the year ending December 31, 2014, the decrease was primarily related to higher capital allocated to the Mortgage Servicing business, which, in turn, resulted
in an increase in the option adjusted spread (“OAS”). The resulting OAS assumption continues to be consistent with capital and return requirements that the Firm
believes a market participant would consider, taking into account factors such as the current operating risk environment and regulatory and economic capital
requirements.