JP Morgan Chase 2008 Annual Report Download - page 188

Notes to consolidated financial statements
186 JPMorgan Chase & Co./ 2008 Annual Report
December 31, 2007 Residential mortgage
(in millions, except rates and where Option Commercial Student
otherwise noted) Credit card Prime(c) Subprime ARMs and other loans Auto
Retained interests $ 3,324 $ 381 $ 387 $ — $ 42 $ 58 $ 106
Weighted-average life (in years) 0.4-0.5 2.9-4.9 2.9 — 0.3-11.0 8.8 0.9
Prepayment rates(a) 15.6-18.9% 19.0-25.3% 25.7% —% 0.0-50.0% 1.0-8.0% 1.4%
PPR CPR CPR CPR CPR ABS
Impact of 10% adverse change $ (59) $ (14) $ (30) $ — $ (1) $ (1) $ (1)
Impact of 20% adverse change (118) (25) (54) — (2) (2) (1)
Loss assumptions 3.3-4.6% 0.0-3.0%(e) 3.3% —% 0.0-0.9% —%(e) 0.6%
Impact of 10% adverse change $ (117) $ (13) $ (68) $ — $ (1) $ — $ (2)
Impact of 20% adverse change (234) (25) (120) — (1) — (3)
Discount rates 12.0% 11.0-23.9% 15.0-30.0% —% 1.0-18.0% 9.0% 6.8%
Impact of 10% adverse change $ (2) $ (18) $ (16) $ — $ — $ (3) $ —
Impact of 20% adverse change (4) (36) (31) — (1) (5) (1)
(a) PPR: principal payment rate; ABS: absolute prepayment speed; CPR: constant prepayment rate.
(b) Excludes certain interests that are not valued using modeling techniques.
(c) Includes Alt-A loans.
(d) Including the valuation assumptions used to determine the fair value for a limited amount of retained interests resulted in a wider range than those used for the majority of the port-
folio. Excluding these retained interests, the range of assumptions used to value the prime/Alt A mortgage retained interests would have been 0.0-29.4% for prepayment rates; 0.0-
25.0% for loss assumptions; and 9.9-21.4% for discount rates.
(e) Expected losses for prime residential mortgage, student loans and certain wholesale securitizations are minimal and are incorporated into other assumptions.
(f) Including the loss assumptions used to determine the fair value for a limited amount of retained interests resulted in a wider range than those used for the majority of the portfolio.
Excluding these retained interests, the range of loss assumption used to value the subprime mortgage retained interests would have been 0.2-43.5%.
(g) The valuation assumptions used to determine the fair value for a limited amount of retained interests were higher than the majority of the portfolio. Excluding these retained interests,
the range of assumptions used to value the commercial and other retained interests would have been 0.0-22.0% for prepayment rates and 3.3-30.4% for the discount rates.
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 assumptions 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. The above sensitivities also do not reflect
the Firm’s risk management practices that may be undertaken to mit-
igate such risks.