eTrade 2011 Annual Report Download - page 66

CONCENTRATIONS OF CREDIT RISK
Loans
We track and review factors to predict and monitor credit risk in the mortgage loan portfolio on an ongoing
basis. These factors include: loan type, estimated current loan-to-value (“LTV”)/combined loan-to-value (“CLTV”)
ratios, delinquency history, documentation type, borrowers’ current credit scores, housing prices, loan acquisition
channel, loan vintage and geographic location of the property. In economic conditions in which housing prices
generally appreciate, we believe that loan type, LTV/CLTV ratios, documentation type and credit scores are the key
factors in determining future loan performance. In a housing market with declining home prices and less credit
available for refinance, we believe the LTV/CLTV ratio becomes a more important factor in predicting and
monitoring credit risk. The factors are updated on at least a quarterly basis. We track and review delinquency status
to predict and monitor credit risk in the consumer and other loan portfolio on an ongoing basis.
The home equity loan portfolio is primarily second lien loans on residential real estate properties, which
have a higher level of credit risk than first lien mortgage loans. Approximately 14% of the home equity portfolio
was in the first lien position as of December 31, 2011. We hold both the first and second lien positions in less
than 1% of the home equity loan portfolio. The home equity loan portfolio consists of home equity installment
loans and home equity lines of credit.
Home equity installment loans are primarily fixed rate and fixed term, fully amortizing loans that do not
offer the option of an interest-only payment. Home equity lines of credit convert to amortizing loans at the end of
the draw period, which ranges from 60 months to 120 months. At December 31, 2011, the vast majority of the
home equity line of credit portfolio had not converted from the interest-only draw period to an amortizing loan.
In addition, approximately 79% of the home equity line of credit portfolio will not begin amortizing until after
2014. The following table outlines when home equity lines of credit convert to amortizing for the home equity
line of credit portfolio as of December 31, 2011:
Period of Conversion to Amortizing Loan
% of Home Equity Line of
Credit Portfolio
Already amortizing 7%
Year ending December 31, 2012 3%
Year ending December 31, 2013 4%
Year ending December 31, 2014 7%
After December 31, 2014 79%
The following tables show the distribution of the mortgage loan portfolios by credit quality indicator
(dollars in millions):
One- to Four-Family Home Equity
December 31, December 31,
Current LTV/CLTV(1) 2011 2010 2011 2010
<=80% $1,596.3 $2,233.2 $1,168.9 $1,484.9
80%-100% 1,716.8 2,329.5 967.9 1,302.9
100%-120% 1,527.3 1,732.1 1,191.9 1,482.8
>120% 1,775.4 1,875.5 2,000.0 2,139.7
Total mortgage loans receivable $6,615.8 $8,170.3 $5,328.7 $6,410.3
Average estimated current LTV/CLTV(2) 106.7% 100.8% 112.1% 107.7%
Average LTV/CLTV at loan origination(3) 71.0% 70.6% 79.2% 79.3%
(1) Current CLTV calculations for home equity loans are based on the maximum available line for home equity lines of credit and
outstanding principal balance for home equity installment loans. Current property values are updated on a quarterly basis using the most
recent property value data available to us. For properties in which we did not have an updated valuation, we utilized home price indices
to estimate the current property value.
(2) The average estimated current LTV/CLTV ratio reflects the outstanding balance at the balance sheet date, divided by the estimated
current value of the underlying property.
(3) Average LTV/CLTV at loan origination calculations are based on LTV/CLTV at time of purchase for one- to four-family purchased
loans and undrawn balances for home equity loans.
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