JP Morgan Chase 2010 Annual Report Download - page 279

JPMorgan Chase & Co./2010 Annual Report
279
(i) the level of current unresolved repurchase demands and mortgage
insurance rescission notices,
(ii) estimated probable future repurchase demands based upon loans
that are or ever have been 90 days past due considering historical
experience,
(iii) the potential ability of the Firm to cure the defects identified in the
repurchase demands,
(iv) the estimated severity of loss upon repurchase of the loan or collat-
eral, make-whole settlement, or indemnification,
(v) the Firm’s potential ability to recover its losses from third-party
originators, and
(vi) the terms of agreements with certain mortgage insurers and other
parties.
Based on these factors, the Firm has recognized a repurchase
liability of $3.3 billion and $1.7 billion, including the Washington
Mutual liability described above, as of December 31, 2010 and
2009, respectively, which is reported in accounts payable and other
liabilities net of probable recoveries from third parties.
Substantially all of the estimates and assumptions underlying the
Firm’s established methodology for computing its recorded repur-
chase liability – including factors such as the amount of probable
future demands from purchasers, the ability of the Firm to cure
identified defects, the severity of loss upon repurchase or foreclo-
sure, and recoveries from third parties – require application of a
significant level of management judgment. Estimating the repur-
chase liability is further complicated by limited and rapidly changing
historical data and uncertainty surrounding numerous external
factors, including: (i) macro-economic factors, and (ii) the level of
future demands, which is dependent, in part, on actions taken by
third parties such as the GSEs and mortgage insurers. While the
Firm uses the best information available to it in estimating its
repurchase liability, the estimation process is inherently uncertain
and imprecise and, accordingly, losses in excess of the amounts
accrued as of December 31, 2010 are reasonably possible.
The Firm believes the estimate of the range of reasonably possible
losses, in excess of reserves established, for its repurchase liability is
from $0 to approximately $2 billion at December 31, 2010. This
estimated range of reasonably possible loss is based on an as-
sumed peak to trough decline in home prices of 46%, which is an
additional 12 percentage point decline in home prices beyond the
Firm’s current assumptions. Such a decline could increase the level
of loan delinquencies, thereby potentially increasing the repurchase
demand rate from the GSEs and increasing loss severity on repur-
chased loans, each of which could affect the Firm’s repurchase
liability. The Firm does not consider such a further decline in home
prices to be likely to occur, and actual repurchase losses could vary
significantly from the Firm’s recorded repurchase liability or this
estimate of reasonably possible additional losses, depending on the
outcome of various factors, including those considered above.
The following table summarizes the change in the repurchase
liability for each of the periods presented.
Summary of changes in repurchase liability
Year ended December 31,
(in millions) 2010 2009 2008
Repurchase liability at begi
n-
ning of period $ 1,705 $ 1,093 $ 15
Realized losses
(a)
(1,423) (1,253)
(
c
)
(155)
Provision for repurchase losses
3,003 1,865 1,233(d)
Repurchase liability at end
of period $ 3,285(b) $ 1,705 $ 1,093
(a) Includes principal losses and accrued interest on repurchased loans, “make-whole”
settlements, settlements with claimants, and certain related expense. For the years
ended December 31, 2010, 2009 and 2008, make-whole settlements were $632
million, $277 million and $34 million, respectively.
(b) Includes $190 million at December 31, 2010, related to future demands on loans
sold by Washington Mutual to the GSEs.
(c) Includes the Firm’s resolution of certain current and future repurchase demands for
certain loans sold by Washington Mutual.
(d) Includes a repurchase liability assumed for certain loans sold by Washington
Mutual; this assumed liability was reported as a reduction of the extraordinary gain
rather than as a charge to the provision for credit losses.
Loans sold with recourse
The Firm provides servicing for mortgages and certain commercial
lending products on both a recourse and nonrecourse basis. In
nonrecourse servicing, the principal credit risk to the Firm is the
cost of temporary servicing advances of funds (i.e., normal servic-
ing advances). In recourse servicing, the servicer agrees to share
credit risk with the owner of the mortgage loans, such as Fannie
Mae or Freddie Mac or a private investor, insurer or guarantor.
Losses on recourse servicing predominantly occur when foreclo-
sure sales proceeds of the property underlying a defaulted loan
are less than the sum of the outstanding principal balance, plus
accrued interest on the loan and the cost of holding and dispos-
ing of the underlying property. The Firm’s securitizations are
predominantly nonrecourse, thereby effectively transferring the
risk of future credit losses to the purchaser of the mortgage-
backed securities issued by the trust. At December 31, 2010 and
2009, the unpaid principal balance of loans sold with recourse
totaled $11.0 billion and $13.5 billion, respectively. The carrying
value of the related liability that the Firm has recorded, which is
representative of the Firm’s view of the likelihood it will have to
perform under this guarantee, was $153 million and $271 million
at December 31, 2010 and 2009, respectively.
Credit card charge-backs
Prior to November 1, 2008, the Firm was a partner with one of
the leading companies in electronic payment services in a joint
venture operating under the name of Chase Paymentech Solu-
tions, LLC (the “joint venture”). The joint venture provided mer-
chant processing services in the U.S. and Canada. The dissolution
of the joint venture was completed on November 1, 2008, and
JPMorgan Chase retained approximately 51% of the business
under the Chase Paymentech name.