JP Morgan Chase 2008 Annual Report Download - page 184

Notes to consolidated financial statements
182 JPMorgan Chase & Co./ 2008 Annual Report
Securitization activity by major product type
The following discussion describes the nature of the Firm’s securitiza-
tion activities by major product type.
Credit Card Securitizations
The Card Services (“CS“) business securitizes originated and pur-
chased credit card loans. The Firm’s primary continuing involvement
includes servicing the receivables, retaining an undivided seller’s
interest in the receivables, retaining certain senior and subordinated
securities and the maintenance of escrow accounts.
CS maintains servicing responsibilities for all credit card securitiza-
tions that it sponsors. As servicer and transferor, the Firm receives
contractual servicing fees based upon the securitized loan balance
plus excess servicing fees, which are recorded in credit card income
as discussed in Note 7 on pages 160–161 of this Annual Report.
The agreements with the credit card securitization trusts require the
Firm to maintain a minimum undivided interest in the trusts (which
generally ranges from 4% to 12%). At December 31, 2008 and
2007, the Firm had $33.3 billion and $18.6 billion, respectively,
related to its undivided interests in the trusts. The Firm maintained
an average undivided interest in principal receivables in the trusts of
approximately 22% and 19% for the years ended December 31,
2008 and 2007, respectively. These undivided interests in the trusts
represent the Firm’s undivided interests in the receivables transferred
to the trust that have not been securitized; these undivided interests
are not represented by security certificates, are carried at historical
cost, and are classified within loans.
Additionally, the Firm retained subordinated interest in accrued inter-
est and fees on the securitized receivables totaling $3.0 billion and
$2.7 billion (net of an allowance for uncollectible amounts) as of
December 31, 2008 and 2007, respectively, which are classified in
other assets.
The Firm retained subordinated securities in credit card securitization
trusts totaling $2.3 billion and $284 million at December 31, 2008
and 2007, respectively, and senior securities totaling $3.5 billion at
December 31, 2008. Of the securities retained, $5.4 billion and $284
million were classified as AFS securities at December 31, 2008 and
2007, respectively. Securities of $389 million that were acquired in
the Washington Mutual Bank transaction were classified as trading
assets at December 31, 2008. The senior AFS securities were used by
the Firm as collateral for a secured financing transaction.
The Firm also maintains escrow accounts up to predetermined limits
for some credit card securitizations to cover deficiencies in cash
flows owed to investors. The amounts available in such escrow
accounts related to credit cards are recorded in other assets and
amounted to $74 million and $97 million as of December 31, 2008
and 2007, respectively.
Mortgage Securitizations
The Firm securitizes originated and purchased residential mortgages
and originated commercial mortgages.
RFS securitizes residential mortgage loans that it originates and pur-
chases and it typically retains servicing for all of its originated and
purchased residential mortgage loans. Additionally, RFS may retain
servicing for certain mortgage loans purchased by IB. As servicer, the
Firm receives servicing fees based upon the securitized loan balance
plus ancillary fees. The Firm also retains the right to service the resi-
dential mortgage loans it sells to the Government National
Mortgage Association (“GNMA”), Federal National Mortgage
Association (“Fannie Mae”) and Federal Home Loan Mortgage
Corporation (“Freddie Mac”) in accordance with their servicing
guidelines and standards. For a discussion of MSRs, see Note 18 on
pages 199–200 of this Annual Report. In a limited number of secu-
ritizations, RFS may retain an interest in addition to servicing rights.
The amount of interest retained related to these securitizations
totaled $939 million and $221 million at December 31, 2008 and
2007, respectively. These retained interests are accounted for as
trading or AFS securities; the classification depends on whether the
retained interest is represented by a security certificate, has an
embedded derivative, and when it was retained (i.e., prior to the
adoption of SFAS 155).
IB securitizes residential mortgage loans (including those that it pur-
chased and certain mortgage loans originated by RFS) and commer-
cial mortgage loans that it originated. Upon securitization, IB may
engage in underwriting and trading activities of the securities issued
by the securitization trust. IB may retain unsold senior and/or subor-
dinated interests (including residual interests) in both residential and
commercial mortgage securitizations at the time of securitization.
These retained interests are accounted for at fair value and classified
as trading assets. The amount of residual interests retained was $155
million and $547 million at December 31, 2008 and 2007, respec-
tively. Additionally, IB retained $2.8 billion of senior and subordinat-
ed interests as of December 31, 2008; these securities were retained
at securitization in connection with the Firm’s underwriting activity.
In addition to the amounts reported in the securitization activity
tables below, the Firm sold residential mortgage loans totaling
$122.0 billion, $81.8 billion and $53.7 billion during the years
ended December 31, 2008, 2007 and 2006, respectively. The majori-
ty of these loan sales were for securitization by the GNMA, Fannie
Mae and Freddie Mac. These sales resulted in pretax gains of $32
million, $47 million and $251 million, respectively.
The Firm’s mortgage loan sales are primarily nonrecourse, thereby
effectively transferring the risk of future credit losses to the purchaser
of the loans. However, for a limited number of loan sales, the Firm is
obligated to share up to 100% of the credit risk associated with the
sold loans with the purchaser. See Note 33 on page 221 of this
Annual Report for additional information on loans sold with recourse.