JP Morgan Chase 2006 Annual Report Download - page 119

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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 2006, 2005 and 2004, based upon securitizations occurring in that year:
Loans securitized in:(a)
2006 2005 2004(c)
Residential mortgage(b) Automobile Residential mortgage(b) Automobile Residential mortgage Automobile
December 31, 2006 4.4% 0.6% 3.5% 0.7% 0.0–3.1% 0.7%
December 31, 2005 NA NA 3.3 0.9 0.0–2.4 0.8
December 31, 2004 NA NA NA NA 0.0–3.3 1.1
(a) Static-pool losses are not applicable to credit card securitizations due to their revolving nature.
(b) Primarily includes subprime residential mortgages securitized in 2006 and 2005 as part of wholesale activities. Expected losses for prime residential mortgage securitizations are minimal for con-
sumer activities.
(c) 2004 results include six months of the combined Firm’s results and six months of heritage JPMorgan Chase results.
JPMorgan Chase & Co. / 2006 Annual Report 117
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 the 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, which might counteract or magnify
the sensitivities.
Consumer activities Wholesale activities
December 31, 2005 Residential Residential Commercial
(in millions, except rates and where otherwise noted) Credit card Automobile Mortgage mortgage and other
Weighted-average life (in years) 0.4–0.7 1.2 0.5-3.5 2.6 0.2–4.1
Prepayment rate 11.9–20.8% 1.5% 20.1-43.7% 22.0–46.6% 0.0–50.0%(c)
PPR ABS CPR CPR CPR
Impact of 10% adverse change $ (44) $ — $ (3) $ (4) $ (1)
Impact of 20% adverse change (88) (2) (5) (4) (2)
Loss assumption 3.2–8.1% 0.7% 0.0–5.2%(a) 0.6–2.0% 0.0%
Impact of 10% adverse change $ (77) $ (4) $ (10) $ (6) $ —
Impact of 20% adverse change (153) (9) (19) (11) —
Discount rate 6.9–12.0% 7.2% 12.7-30.0%(b) 16.0–18.5% 0.2–4.7%
Impact of 10% adverse change $ (2) $ (1) $ (4) $ (6) $ —
Impact of 20% adverse change (4) (3) (8) (12) —
(a) Expected credit losses for prime residential mortgage are minimal and are incorporated into other assumptions.
(b) The Firm sold certain residual interests from subprime mortgage securitizations via Net Interest Margin (“NIM”) securitizations and retains residual interests in these NIM transactions, which are val-
ued using a 30% discount rate.
(c) Prepayment risk on certain wholesale retained interests for commercial and other are minimal and are incorporated into other assumptions.