JP Morgan Chase 2003 Annual Report Download - page 103

J.P. Morgan Chase & Co. / 2003 Annual Report 101
available, the Firm usually estimates fair value of these retained
interests by determining the present value of future expected cash
flow s using modeling techniques. Such models incorporate man-
agement’s best estimates of key variables, such as expected credit
losses, prepayment speeds and discount rates appropriate for the
risks involved. Gains on securitizations are reported in Other rev-
enue. Retained interests that are subject to prepayment risk, such
that JPM organ Chase may not recover substantially all of its invest-
ment, are recorded at fair value, w ith subsequent adjustments
reflected in Other comprehensive income or in earnings, if the fair
value of the retained interest has declined below its carrying amount
and such decline has been determined to be other-than-temporary.
JPM organ Chase–sponsored securitizations utilize SPEs as part of
the securitization process. These SPEs are structured to meet the
definition of a QSPE (as discussed in Note 1); accordingly, the
assets and liabilities of securitization-related SPEs are not reflected
in the Firm’s Consolidated balance sheet (except for retained inter-
ests as described below ) but are included on the balance sheet of
the SPE purchasing the assets. Assets held by securitization-related
SPEs as of December 31, 2003 and 2002, w ere as follow s:
December 31, (in billions) 2003 2002
Credit card receivables $42.6 $ 40.2
Residential mortgage receivables 21.1 20.6
Commercial loans 33.8 25.2
Automobile loans 6.5 4.5
Other receivables —0.1
Total $104.0 $ 90.6
Interests in the securitized loans are generally retained by the
Firm in the form of senior or subordinated interest-only strips,
subordinated tranches, escrow accounts and servicing rights,
and they are primarily recorded in Other assets. In addition,
credit card securitization trusts require the Firm to maintain a
minimum undivided interest in the trusts, representing the
Firm’s interests in the receivables transferred to the trust that
have not been securitized. These interests are not represented
by security certificates. The Firm’s undivided interests are car-
ried at historical cost and are classified in Loans.
JPM organ Chase retains servicing responsibilities for all
residential mortgage, credit card and automobile loan securi-
tizations and for certain commercial loan securitizations it
establishes. The Firm receives annual servicing fees based on
the securitized loan balance plus certain ancillary fees. It also
retains the right to service the residential mortgage loans it
sells in connection w ith mortgage-backed securities transac-
tions w ith the Government National M ortgage Association
(“ GNM A” ), Federal National M ortgage Association (“ FNM A” )
and Federal Home Loan M ortgage Corporation (“ Freddie
M ac” ). For a discussion of mortgage servicing rights, see
Note 16 on pages 107-109 of this Annual Report.
The follow ing table summarizes new securitization transactions
that w ere completed during 2003 and 2002; the resulting gains
arising from such securitizations; certain cash flow s received from
such securitizations; and the key economic assumptions used in
measuring the retained interests, as of the dates of such sales:
Year ended December 31,
2003 2002
($ in millions) Mortgage Credit card Automobile Commercial Mortgage Credit card Automobile Commercial
Principal Securitized $13,270 $ 8,823 $ 4,510 $ 5,386 $7,220 $ 9,350 $ 3,392 $ 4,300
Pre-tax gains 168 44 13 107 214 45 6 53
Cash flow inform ation:
Proceeds from securitizations $13,540 $ 8,823 $ 4,503 $ 5,493 $7,403 $ 9,350 $ 3,386 $ 4,284
Servicing fees collected 20 79 15 2 15 73 20 —
Other cash flows received 2216 12 8 11 211 27 2
Proceeds from collections reinvested in
revolving securitizations —58,199 — — —44,645 — 334
Key assumpt ions (rates per annum):
Prepayment rate(a) 10.1-36.2% CPR 8.1-16.5% 1.52-1.57% 50.0% 10.1-25.0% CPR 14.6-14.9% 1.51-1.52% NA(b)
WAC/WAM WAC/WAM
Weighted-average life 2.0-4.6 years 7-12 m onths 1.7-1.8 years 1.3-5.2 years 3.0-7.7 years 7 months 1.8 years 7.3 years
Expected credit losses 0.0-2.5% (c) 5.5-8.0% 0.5-0.6% NA(d) 0-1.0%(c) 5.4-5.9% 0.5% NA(d)
Discount rate 13.0-30.0% 12.0% 3.9-4.5% 1.0-5.0% 15.0-30.0% 5.1-5.9% 5.7-5.9% 8.8%
(a) CPR: Constant prepayment rate; WAC/WAM : Weighted-average coupon/weighted-average maturity.
(b) Not applicable since these retained interests are not subject to prepayment risk.
(c) Expected credit losses for prime mortgage securitizations are minimal and are incorporated into other assumptions.
(d) Not applicable due to collateral coverage on loans in commercial securitizations.