JP Morgan Chase 2010 Annual Report Download - page 98

Management’s discussion and analysis
JPMorgan Chase & Co./2010 Annual Report
98
Repurchase liability
In connection with the Firm’s loan sale and securitization activities
with Fannie Mae and Freddie Mac (the “GSEs”) and other loan sale
and private-label securitization transactions, the Firm has made
representations and warranties that the loans sold meet certain
requirements. For transactions with the GSEs, these representations
relate to type of collateral, underwriting standards, validity of
certain borrower representations in connection with the loan,
primary mortgage insurance being in force for any mortgage loan
with a loan-to-value ratio (“LTV”) greater than 80%, and the use
of the GSEs’ standard legal documentation. The Firm may be, and
has been, required to repurchase loans and/or indemnify the GSEs
and other investors for losses due to material breaches of these
representations and warranties; however, predominantly all of the
repurchase demands received by the Firm and the Firm’s losses
realized to date are related to loans sold to the GSEs.
To date, the repurchase demands the Firm has received from the
GSEs primarily relate to loans originated from 2005 to 2008.
Demands against the pre-2005 and post-2008 vintages have not
been significant; the Firm attributes this to the comparatively
favorable credit performance of these vintages and to the enhanced
underwriting and loan qualification standards implemented
progressively during 2007 and 2008. From 2005 to 2008, excluding
Washington Mutual, loans sold to the GSEs subject to representations
and warranties for which the Firm may be liable were approximately
$380 billion; this amount represents the principal amount of loans
sold throughout 2005 to 2008 and has not been adjusted for
subsequent activity, such as borrower repayments of principal or
repurchases completed to date. See the discussion below for
information concerning the process the Firm uses to evaluate
repurchase demands for breaches of representations and warranties,
and the Firm’s estimate of probable losses related to such exposure.
From 2005 to 2008, Washington Mutual sold approximately $150
billion of loans to the GSEs subject to certain representations and
warranties. Subsequent to the Firm’s acquisition of certain assets and
liabilities of Washington Mutual from the FDIC in September 2008,
the Firm resolved and/or limited certain current and future repurchase
demands for loans sold to the GSEs by Washington Mutual, although
it remains the Firm’s position that such obligations remain with the
FDIC receivership. Nevertheless, certain payments have been made
with respect to certain of the then current and future repurchase
demands, and the Firm will continue to evaluate and may pay
certain future repurchase demands related to individual loans. In
addition to the payments already made, the Firm estimates it has a
remaining repurchase liability of approximately $190 million as of
December 31, 2010, relating to unresolved and future demands on
loans sold to the GSEs by Washington Mutual. After consideration of
this repurchase liability, the Firm believes that the remaining GSE
repurchase exposure related to Washington Mutual presents minimal
future risk to the Firm’s financial results.
The Firm also sells loans in securitization transactions with Ginnie
Mae; these loans are typically insured by the Federal Housing
Administration (“FHA”) or the Rural Housing Administration
(“RHA”) and/or guaranteed by the U.S. Department of Veterans
Affairs (“VA”). The Firm, in its role as servicer, may elect to
repurchase delinquent loans securitized by Ginnie Mae in
accordance with guidelines prescribed by Ginnie Mae, FHA, RHA
and VA. Amounts due under the terms of these loans continue to
be insured and the reimbursement of insured amounts is
proceeding normally. Accordingly, the Firm has not recorded any
repurchase liability related to these loans.
From 2005 to 2008, the Firm and certain acquired entities sold or
deposited approximately $450 billion of residential mortgage loans to
securitization trusts in private-label securitizations they sponsored. In
connection therewith certain representations and warranties were
made related to these loans. With respect to the $165 billion of
private-label securitizations originated by Washington Mutual, it is
the Firm’s position that repurchase obligations remain with the FDIC
receivership.
While the terms of the securitization transactions vary, they generally
differ from loan sales to GSEs in that, among other things: (i) in order
to direct the trustee to investigate loan files, the security holders must
make a formal request for the trustee to do so, and typically, this
requires agreement of the holders of a specified percentage of the
outstanding securities; (ii) generally, the mortgage loans are not
required to meet all GSE eligibility criteria; and (iii) in many cases, the
party demanding repurchase is required to demonstrate that a loan-
level breach of a representation or warranty has materially and
adversely affected the value of the loan. Of the $450 billion
originally sold or deposited (including $165 billion by Washington
Mutual, as to which the Firm maintains the repurchase obligations
remain with the FDIC receivership), approximately $180 billion of
principal has been repaid. Approximately $80 billion of loans have
been liquidated, with an average loss severity of 57%. The
remaining outstanding principal balance of these loans as of
December 31, 2010, was approximately $190 billion.
To date, loan-level repurchase demands in private-label
securitizations have been limited. As a result, the Firm’s repurchase
reserve primarily relates to loan sales to the GSEs and is
predominantly derived from repurchase activity with the GSEs. While
it is possible that the volume of repurchase demands in private-label
securitizations will increase in the future, the Firm cannot offer a
reasonable estimate of those future demands based on historical
experience to date. Thus far, claims related to private-label
securitizations (including from insurers that have guaranteed certain
obligations of the securitization trusts) have generally manifested
themselves through securities-related litigation. The Firm separately
evaluates its exposure to such litigation in establishing its litigation
reserves. For additional information regarding litigation, see Note 32
on pages 282–289 of this Annual Report.