JP Morgan Chase 2005 Annual Report Download - page 112

Notes to consolidated financial statements
JPMorgan Chase & Co.
110 JPMorgan Chase & Co. /2005 Annual Report
The table below outlines the key economic assumptions used to determine the fair value of the other retained interests at December 31, 2005 and 2004,
respectively; and it outlines the sensitivities of those fair values to immediate 10% and 20% adverse changes in those assumptions:
December 31, 2005 (in millions) Residential mortgage Credit card Automobile Wholesale activities
Weighted-average life (in years) 0.5–3.5 0.4–0.7 1.2 0.2–4.1
Prepayment rate 20.1–43.7% CPR 11.9–20.8% PPR 1.5% ABS 0.0–50.0%(a)
Impact of 10% adverse change $ (3) $ (44) $ — $ (5)
Impact of 20% adverse change (5) (88) (2) (6)
Loss assumption 0.0–5.2%(b) 3.2–8.1% 0.7% 0.0–2.0%(b)
Impact of 10% adverse change $ (10) $ (77) $ (4) $ (6)
Impact of 20% adverse change (19) (153) (9) (11)
Discount rate 12.7–30.0%(c) 6.9–12.0% 7.2% 0.2–18.5%
Impact of 10% adverse change $ (4) $ (2) $ (1) $ (6)
Impact of 20% adverse change (8) (4) (3) (12)
December 31, 2004 (in millions) Residential mortgage Credit card Automobile Wholesale activities
Weighted-average life (in years) 0.8–3.4 0.5–1.0 1.3 0.2–4.0
Prepayment rate 15.1–37.1% CPR 8.3–16.7% PPR 1.4% ABS 0.0–50.0%(a)
Impact of 10% adverse change $ (5) $ (34) $ (6) $ (1)
Impact of 20% adverse change (8) (69) (13) (1)
Loss assumption 0.0–5.0%(b) 5.7–8.4% 0.7% 0.0–3.0%(b)
Impact of 10% adverse change $ (17) $ (144) $ (4) $ —
Impact of 20% adverse change (34) (280) (8) —
Discount rate 13.0–30.0%(c) 4.9–12.0% 5.5% 1.0–22.9%
Impact of 10% adverse change $ (9) $ (2) $ (1) $ —
Impact of 20% adverse change (18) (4) (2) —
(a) Prepayment risk on certain wholesale retained interests are minimal and are incorporated into other assumptions.
(b) Expected credit losses for prime residential mortgage and certain wholesale securitizations are minimal and are incorporated into other assumptions.
(c) The Firm sold certain residual interests from sub-prime mortgage securitizations via Net Interest Margin (“NIM”) securitizations and retains residual interests in these NIM transactions,
which are valued using a 30% discount rate.
The sensitivity analysis in the preceding table is hypothetical. Changes in fair
value based upon a 10% or 20% variation in assumptions generally cannot
be extrapolated easily, because the relationship of the change in the assump-
tions 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 without changing any other assumption. In reality, changes in one
factor may result in changes in another assumption, which 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.
The table below displays the expected static-pool net credit losses for 2005, 2004 and 2003, based upon securitizations occurring in that year:
Loans securitized in:(a)
2005 2004(b) 2003(b)
Residential mortgage(c) Automobile Residential mortgage Automobile Residential mortgage Automobile
December 31, 2005 0.0% 0.9% 0.0–2.4% 0.8% 0.0–2.0% 0.5%
December 31, 2004 NA NA 0.0–3.3 1.1 0.0–2.1 0.9
December 31, 2003 NA NA NA NA 0.0–3.6 0.9
(a) Static-pool losses are not applicable to credit card securitizations due to their revolving structure.
(b) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results. 2003 reflects the results of heritage JPMorgan Chase only.
(c) 2005 securitizations consist of prime-mortgage securitizations only. Expected losses are minimal and incorporated in other assumptions.