JP Morgan Chase 2010 Annual Report Download - page 227

JPMorgan Chase & Co./2010 Annual Report 227
Consumer loan portfolio
Consumer loans, excluding credit card loans, consist primarily of
residential mortgages, home equity loans, auto loans, business
banking loans, and student and other loans, with a primary focus
on serving the prime consumer credit market. The portfolio also
includes home equity loans secured by junior liens and mortgage
loans with interest-only payment options to predominantly prime
borrowers, as well as certain payment-option loans originated by
Washington Mutual that may result in negative amortization.
The table below provides information about consumer retained
loans by class, excluding the credit card loan portfolio segment.
December 31, (in millions)
2010
2009
Residential real estate
–
excluding PCI
Home equity:
Senior lien
(a)
$ 24,376 $ 27,376
Junior lien
(b)
64,009 74,049
Mortgages:
Prime, including option ARMs
(c)
74,539 75,428
Subprime
(c)
11,287 12,526
Other consumer loans
Auto
(c)
48,367 46,031
Business banking
16,812
16,974
Student and other
(c)
15,311 14,726
Residential real estate
–
PCI
Home equity
24,459
26,520
Prime mortgage
17,322
19,693
Subprime mortgage
5,398
5,993
Option ARMs
25,584
29,039
Total
retained loans
$
327,
464
$ 348,355
(a) Represents loans where JPMorgan Chase holds the first security interest on
the property.
(b) Represents loans where JPMorgan Chase holds a security interest that is
subordinate in rank to other liens.
(c) Effective January 1, 2010, the Firm adopted accounting guidance related to
VIEs. Upon adoption of the guidance, the Firm consolidated $4.8 billion of
certain consumer loan securitization entities, primarily mortgage-related.
For further information, see Note 16 on pages 244–259 of this Annual Re-
port.
Delinquency rates are a primary credit quality indicator for con-
sumer loans. Loans that are more than 30 days past due provide
an early warning of borrowers that may be experiencing financial
difficulties and/or who may be unable or unwilling to repay the
loan. As the loan continues to age, it becomes more clear that
the borrower is likely either unable or unwilling to pay. In the
case of residential real estate loans, late-stage delinquencies
(greater than 150 days past due) are a strong indicator of loans
that will ultimately result in a short sale or foreclosure. In addition
to delinquency rates, other credit quality indicators for consumer
loans vary based on the class of loan, as follows:
• For residential real estate loans, including both non-PCI and
PCI portfolios, the current estimated loan-to-value (“LTV”) ra-
tio, or the combined LTV ratio in the case of loans with a junior
lien, is an indicator of the potential loss severity in the event of
default. Additionally, LTV or combined LTV can provide insight
into a borrower’s continued willingness to pay, as the delin-
quency rate of high-LTV loans tends to be greater than that for
loans where the borrower has equity in the collateral. The
geographic distribution of the loan collateral also provides in-
sight as to the credit quality of the portfolio, as factors such as
the regional economy, home price changes and specific events
such as hurricanes, earthquakes, etc. will affect credit quality.
The borrowers’ current or “refreshed” FICO score is a secon-
dary credit-quality indicator for certain loans, as FICO scores
are an indication of the borrower’s credit payment history.
Thus, a loan to a borrower with a low FICO score (660 or be-
low) is considered to be of higher risk than a loan to a bor-
rower with a high FICO score. Further, a loan to a borrower
with a high LTV ratio and a low FICO score is at greater risk of
default than a loan to a borrower that has both a high LTV ra-
tio and a high FICO score.
• For auto, scored business banking and student loans, geo-
graphic distribution is an indicator of the credit performance of
the portfolio. Similar to residential real estate loans, geo-
graphic distribution provides insights into the portfolio per-
formance based on regional economic activity and events.
• Risk-rated business banking and auto loans are similar to
wholesale loans in that the primary credit quality indicators are
the risk rating that is assigned to the loan and whether the
loans are considered to be criticized and/or nonaccrual. Risk
ratings are reviewed on a regular and ongoing basis by Credit
Risk Management and are adjusted as necessary for updated
information affecting borrowers’ ability to fulfill their obliga-
tions. Consistent with other classes of consumer loans, the
geographic distribution of the portfolio provides insights into
portfolio performance based on regional economic activity and
events.