JP Morgan Chase 2008 Annual Report Download - page 190

Notes to consolidated financial statements
188 JPMorgan Chase & Co./ 2008 Annual Report
Subprime adjustable-rate mortgage loan modifications
See the Glossary of Terms on page 232 of this Annual Report for the
Firm’s definition of subprime loans. Within the confines of the limit-
ed decision-making abilities of a QSPE under SFAS 140, the operat-
ing documents that govern existing subprime securitizations gener-
ally authorize the servicer to modify loans for which default is rea-
sonably foreseeable, provided that the modification is in the best
interests of the QSPE’s beneficial interest holders and would not
result in a REMIC violation.
In December 2007, the American Securitization Forum (“ASF”) issued
the “Streamlined Foreclosure and Loss Avoidance Framework for
Securitized Subprime Adjustable Rate Mortgage Loans” (the
“Framework”).The Framework provides guidance for servicers to
streamline evaluation procedures for borrowers with certain subprime
adjustable rate mortgage (“ARM”) loans to more efficiently provide
modifications of such loans with terms that are more appropriate for
the individual needs of such borrowers. The Framework applies to all
first-lien subprime ARM loans that have a fixed rate of interest for an
initial period of 36 months or less, are included in securitized pools,
were originated between January 1, 2005, and July 31, 2007, and
have an initial interest rate reset date between January 1, 2008, and
July 31, 2010 (“ASF Framework Loans”).
The Framework categorizes the population of ASF Framework Loans
into three segments: Segment 1 includes loans where the borrower
is current and is likely to be able to refinance into any readily avail-
able mortgage product; Segment 2 includes loans where the bor-
rower is current, is unlikely to be able to refinance into any readily
available mortgage industry product and meets certain defined crite-
ria; and Segment 3 includes loans where the borrower is not cur-
rent, as defined, and does not meet the criteria for Segments 1 or 2.
ASF Framework Loans in Segment 2 of the Framework are eligible
for fast-track modification under which the interest rate will be kept
at the existing initial rate, generally for five years following the
interest rate reset date. The Framework indicates that for Segment 2
loans, JPMorgan Chase, as servicer, may presume that the borrower
will be unable to make payments pursuant to the original terms of
the borrower’s loan after the initial interest rate reset date. Thus, the
Firm may presume that a default on that loan by the borrower is
reasonably foreseeable unless the terms of the loan are modified.
JPMorgan Chase has adopted the loss mitigation approaches under
the Framework for securitized subprime ARM loans that meet the
specific Segment 2 criteria and began modifying Segment 2 loans
during the first quarter of 2008. The adoption of the Framework did
not affect the off-balance sheet accounting treatment of JPMorgan
Chase-sponsored QSPEs that hold Segment 2 subprime loans.
The total dollar amount of assets owned by Firm-sponsored QSPEs
that hold subprime adjustable rate mortgage loans as of December
31, 2008 and 2007, was $30.8 billion and $20.0 billion, respectively.
Of these amounts, $12.7 billion and $9.7 billion, respectively, are
related to ASF Framework Loans serviced by the Firm. Included within
the assets owned by Firm-sponsored QSPEs was foreclosure-related
real estate owned, for which JPMorgan Chase is the servicer, in the
amount of $3.5 billion and $637 million at December 31, 2008 and
2007, respectively. The growth in real estate owned in 2008 is
attributable to the Washington Mutual transaction and increased
foreclosures resulting from current housing market conditions. The
following table presents the principal amounts of ASF Framework
Loans, serviced by the Firm, that are owned by Firm-sponsored
QSPEs that fell within Segments 1, 2 and 3 as of December 31,
2008 and 2007, respectively.
December 31, 2008 2007
(in millions, except ratios) Amount % Amount %
Segment 1 $ 1,940 15% $ 1,940 20%
Segment 2 2,930 23 970 10
Segment 3 7,806 62 6,790 70
Total $ 12,676 100% $ 9,700 100%
The estimates of segment classification could change substantially in
the future as a result of future changes in housing values, economic
conditions, borrower/investor behavior and other factors.
The total principal amount of beneficial interests issued by the Firm-
sponsored securitizations that hold ASF Framework Loans as of
December 31, 2008 and 2007, was as follows.
December 31, (in millions) 2008 2007
Third-party $ 44,401 $ 19,636
Retained interest 99 412
Total $ 44,500 $ 20,048
For those ASF Framework Loans serviced by the Firm and owned by
Firm-sponsored QSPEs, the Firm modified principal amounts of $1.7
billion of Segment 2 subprime mortgages during the year ended
December 31, 2008. There were no Segment 2 subprime mortgages
modified during the year ended December 31, 2007. For Segment 3
loans, the Firm has adopted a loss mitigation approach, without
employing the fast-track modifications prescribed for Segment 2
subprime mortgages, that is intended to maximize the recoveries of
the securitization trust. The loss mitigation approach chosen by
JPMorgan Chase is consistent with the applicable servicing agree-
ments and could include rate reductions, principal forgiveness, for-
bearance and other actions intended to minimize economic loss and
avoid foreclosure. The table below presents selected information
relating to the principal amount of Segment 3 loans for the year
ended December 31, 2008, including those that have been modified,
subjected to other loss mitigation activities or have been prepaid by
the borrower.
Year ended December 31, 2008 (in millions)
Loan modifications $ 2,384
Other loss mitigation activities 865
Prepayments 219
The impact of loss mitigation efforts on the fair value of the Firm’s
retained interests in ASF Framework loans was not material at
December 31, 2008.