JP Morgan Chase 2010 Annual Report Download - page 100

Management’s discussion and analysis
JPMorgan Chase & Co./2010 Annual Report
100
delinquencies and repurchase demands. In response to these
changing trends, in the third quarter of 2010, the Firm refined its
estimate of probable future repurchase demands by separately
forecasting near-term repurchase demands (using outstanding file
requests) and longer-term repurchase demands (considering
delinquent loans for which no file request has been received).
The Firm believes that this refined estimation process produces a
better estimate of probable future repurchase demands since it
directly incorporates the Firm’s recent file request experience. The
Firm also believes that the refined estimation process will better
reflect emerging trends in file requests as well as the relationship
between file requests and ultimate repurchase demands. This
refinement in the Firm’s estimation process resulted in a higher
estimated amount of probable future demands from the GSEs, and
this revised future repurchase demand assumption, along with an
overall increase in repurchase demands from the GSEs during 2010,
were the primary drivers of the $1.6 billion increase in the Firm’s
repurchase liability during 2010.
The following tables show the trend in repurchase demands and mortgage insurance rescission notices received by loan origination vintage,
excluding those related to Washington Mutual, for the five most recent quarters. Due to the rate at which developments have occurred in this
area, management does not believe that it would be useful or meaningful to report quarterly information for periods prior to the quarter ended
December 31, 2009; the most meaningful trends are those which are more recent.
Quarterly repurchase demands received by loan origination vintage
(in millions)
December 31,
2010
September 30,
2010
June 30,
2010
March 31,
2010
December 31,
2009
Pre-2005
$
38
$ 31 $ 35 $ 16 $
12
2005
72
67 94 50
40
2006
195
185 234 189
166
2007
537
498 521 403
425
2008
254
191 186 98
157
Post-2008
65
46 53 20
26
Total repurchase demands received
$
1,161
$ 1,018 $ 1,123 $ 776 $
826
Quarterly mortgage insurance rescission notices received by loan origination vintage
(in millions)
Decemb
er 31,
2010
September 30,
2010
June 30,
2010
March 31,
2010
December 31,
2009
Pre-2005
$
3
$ 4 $ 4 $ 2 $
3
2005
7
5 7 18
22
2006
40
39 39 57
50
2007
113
105 155 203
221
2008
49
44 52 60
69
Post-2008
1
— — —
—
Total mortgage insurance
rescissions received(a) $ 213 $ 197 $ 257 $ 340 $
365
(a) Mortgage insurance rescissions may ultimately result in a repurchase demand from the GSEs on a lagged basis. This table includes mortgage insurance rescissions
where the GSEs have also issued a repurchase demand.
Because the Firm has demonstrated an ability to cure certain types
of defects more frequently than others (e.g., missing documents),
trends in the types of defects identified as well as the Firm’s
historical data are considered in estimating the future cure rate.
During 2010, the Firm’s overall cure rate, excluding Washington
Mutual loans, has been approximately 50%. While the actual cure
rate may vary from quarter to quarter, the Firm expects that the
overall cure rate will remain in the 40–50% range for the
foreseeable future.
The Firm has not observed a direct relationship between the type of
defect that causes the breach of representations and warranties
and the severity of the realized loss. Therefore, the loss severity
assumption is estimated using the Firm’s historical experience and
projections regarding home price appreciation. Actual loss
severities on finalized repurchases and “make-whole” settlements,
excluding any related to Washington Mutual loans, currently
average approximately 50%, but may vary from quarter to quarter
based on the characteristics of the underlying loans and changes in
home prices.