JP Morgan Chase 2003 Annual Report Download - page 104

Notes to consolidated financial statements
J.P. M organ Chase & Co.
102 J.P. Morgan Chase & Co./ 2003 Annual Report
In addition, the Firm sold residential mortgage loans totaling
$123 billion and $62.2 billion during 2003 and 2002,
respectively, primarily as GNM A, FNM A and Freddie M ac
mortgage-backed securities; these sales resulted in gains of
$564 million in 2003 and $388 million in 2002.
At December 31, 2003 and 2002, the Firm had, w ith respect to
its credit card master trusts, $7.3 billion related to its undivided
interest, and $1.1 billion and $978 million, respectively, related
to its subordinated interest in accrued interest and fees on the
securitized receivables.
The Firm also maintains escrow accounts up to predetermined
limits for some of its credit card and automobile securitizations,
in the unlikely event of deficiencies in cash flow s ow ed to
investors. The amounts available in such escrow accounts are
recorded in Other assets and, as of December 31, 2003,
amounted to $456 million and $137 million for credit card and
automobile securitizations, respectively; as of December 31, 2002,
these amounts w ere $510 million and $94 million for credit card and
automobile securitizations, respectively.
The table below summarizes other retained securitization interests,
primarily subordinated or residual interests, w hich are carried at
fair value on the Firm’s Consolidated balance sheets.
December 31, (in millions) 2003 2002
Loans
Residential mortgage $570(a) $ 684(a)
Credit card 193(a) 92(a)
Automobile 151(a) 151(a)
Commercial 34 94
Total $948 $ 1,021
(a) Pre-tax unrealized gains (losses) recorded in Stockholders’ equity that relate to retained
securitization interests totaled $155 million and $156 million, $11 million and $(1) million,
and $6 million and $21 million for residential mortgage, credit card and automobile, at
December 31, 2003 and 2002, respectively.
The table below outlines the key economic assumptions and the sensitivity of fair values at December 31, 2003, of the remaining retained
interests to immediate 10% and 20% adverse changes in those assumptions:
December 31, 2003 (in millions) Mortgage Credit card Automobile Commercial
Weighted-average life 1.4–2.7 years 5–15 months 1.5 years 0.6–5.9 years
Prepayment rate 29.0–31.7% CPR 8.1–15.1% 1.5% WAC/WAM NA(a), 50.0%
Impact of 10% adverse change $ (17) $ (7) $ (10) $ (1)
Impact of 20% adverse change (31) (13) (19) (2)
Loss assumption 0.0–4.0%(b) 5.5–8.0% 0.6% NA(c)
Impact of 10% adverse change $ (28) $ (21) $ (6) $ —
Impact of 20% adverse change (57) (41) (12) —
Discount rate 13.0–30.0%(d) 8.3–12.0% 4.4% 5.0–20.9%
Impact of 10% adverse change $ (14) $ (1) $ (1) $ (1)
Impact of 20% adverse change (27) (3) (2) (2)
(a) Prepayment risk on certain commercial retained interests are minimal and are incorporated into other assumptions.
(b) Expected credit losses for prime mortgage securitizations are minimal and are incorporated into other assumptions.
(c) Not applicable, as modeling assumptions for predominantly all of the commercial retained interests consider overcollateralization coverage.
(d) During 2003, the Firm sold certain residual interests of approximately $390.5 million from sub-prime mortgage securitizations via Net Interest Margin (“ NIM” ) securitizations. The Firm retained residual
interests in these and prior NIM securitizations of approximately $169.8 million, which are valued using a 30% discount rate.
The table below displays the expected static-pool net credit losses
for 2003, 2002 and 2001, based on securitizations occurring in
that year:
Loans securitized in:(a)(b)
2003 2002 2001
Mortgage Auto Mortgage Auto Mortgage Auto
December 31, 2003 0.0 –3.6% 0.9% 0.0–2.8% 0.8% 0.0–2.7% 1.0%
December 31, 2002 NA NA 0.1–3.7 0.9 0.1–3.8 0.9
December 31, 2001 NA NA NA NA 0.1–2.3 0.8
(a) No expected static-pool net credit losses on commercial securitizations due to collateral coverage
on loans in commercial securitizations.
(b) Static-pool losses not applicable to credit card securitizations due to their revolving structure.
The sensitivity analysis in the preceding table is hypothetical.
Changes in fair value based on a 10% or 20% variation in
assumptions generally cannot be extrapolated easily, because
the relationship of the change in the assumptions to the change
in fair value may not be linear. Also, in this table, the effect that
a change in a particular assumption may have on the fair value
is calculated w ithout changing any other assumption. In reality,
changes in one factor may result in changes in another assump-
tion, w hich might counteract or magnify the sensitivities.
Expected static-pool net credit losses include actual incurred
losses plus projected net credit losses, divided by the original
balance of the outstandings comprising the securitization pool.