JP Morgan Chase 2012 Annual Report Download - page 130

Management’s discussion and analysis
140 JPMorgan Chase & Co./2012 Annual Report
(g) Excludes PCI loans. Because the Firm is recognizing interest income on each pool of PCI loans, they are all considered to be performing.
(h) At December 31, 2012, included $1.8 billion of Chapter 7 loans as well as $1.2 billion of performing junior liens that are subordinate to senior liens that
are 90 days or more past due. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.
(i) Charge-offs and net charge-off rates for the year ended December 31, 2012, included net charge-offs of Chapter 7 loans of $91 million for senior lien home
equity, $539 million for junior lien home equity, $47 million for prime mortgage, including option ARMs, $70 million for subprime mortgage and $53
million for auto loans. Net charge-off rates for the for the year ended December 31, 2012, excluding these net charge-offs would have been 0.90%, 3.03%,
0.58%, 4.65% and 0.28% for the senior lien home equity, junior lien home equity, prime mortgage, including option ARMs, subprime mortgages and auto
loans, respectively. See Consumer Credit Portfolio on pages 138–149 of this Annual Report for further details.
(j) Average consumer loans held-for-sale were $433 million and $924 million, respectively, for the years ended December 31, 2012 and 2011. These amounts
were excluded when calculating net charge-off rates.
Consumer, excluding credit card
At December 31, 2012, the Firm reported, in accordance
with regulatory guidance, $1.7 billion of residential real
estate and auto loans that have been discharged under
Chapter 7 bankruptcy and not reaffirmed by the borrower
(“Chapter 7 loans”) as collateral-dependent nonaccrual
troubled debt restructurings (“TDRs”), regardless of their
delinquency status. Pursuant to that guidance, these
Chapter 7 loans were charged off to the net realizable value
of the collateral, resulting in $800 million of charge-offs for
the year ended December 31, 2012. The Firm expects to
recover a significant amount of these losses over time as
principal payments are received. Prior to September 30,
2012, the Firm’s policy was to charge down to net
realizable value loans to borrowers who had filed for
bankruptcy when such loans became 60 days past due, and
report such loans as nonaccrual at that time. However, the
Firm did not previously report loans discharged under
Chapter 7 bankruptcy as TDRs unless otherwise modified
under one of the Firm’s loss mitigation programs. Prior
periods have not been restated for this policy change.
Based upon regulatory guidance, the Firm also began
reporting performing junior liens that are subordinate to
senior liens that are 90 days or more past due as
nonaccrual loans in the first quarter of 2012. The prior year
was also not restated for this policy change. The
classification of certain of these higher-risk junior lien loans
as nonaccrual did not have an impact on the allowance for
loan losses as the Firm had previously considered the risk
characteristics of this portfolio in estimating its allowance
for loan losses. This regulatory policy change had a minimal
impact on the Firm’s net interest income during the year
ended December 31, 2012, because predominantly all of
the reclassified junior lien loans are currently making
payments, and it is the Firm’s policy to recognize these cash
interest payments received as interest income.
For more information regarding the impact of these
changes to nonaccrual loans and net charge-offs, see the
Nonaccrual loans section on page 146 of this Annual Report
and the Consumer Credit Portfolio table on page 139 of this
Annual Report.
Portfolio analysis
Consumer loan balances declined during the year ended
December 31, 2012, due to paydowns and charge-offs.
Credit performance has improved across most portfolios but
residential real estate charge-offs and delinquent loans
remain above normal levels.
The following discussion relates to the specific loan and
lending-related categories. PCI loans are generally excluded
from individual loan product discussions and are addressed
separately below. For further information about the Firm’s
consumer portfolio, including information about
delinquencies, loan modifications and other credit quality
indicators, see Note 14 on pages 250–275 of this Annual
Report.
Home equity: Home equity loans at December 31, 2012,
were $67.4 billion, compared with $77.8 billion at
December 31, 2011. The decrease in this portfolio
primarily reflected loan paydowns and charge-offs. Early-
stage delinquencies showed improvement from
December 31, 2011, for both senior and junior lien home
equity loans, while net charge-offs for the year ended
December 31, 2012, which include Chapter 7 loan charge-
offs, decreased from the prior year. Senior lien and junior
lien nonaccrual loans increased $890 million in 2012 due
to the inclusion of Chapter 7 loans. Junior lien nonaccrual
loans also increased from December 31, 2011, due to the
addition of $1.2 billion of performing junior liens that are
subordinate to senior liens that are 90 days or more past
due based upon regulatory guidance issued during the first
quarter of 2012.
Approximately 20% of the Firm’s home equity portfolio
consists of home equity loans (“HELOANs”) and the
remainder consists of home equity lines of credit
(“HELOCs”). HELOANs are generally fixed-rate, closed-end,
amortizing loans, with terms ranging from 3–30 years.
Approximately half of the HELOANs are senior liens and the
remainder are junior liens. In general, HELOCs originated by
the Firm are revolving loans for a 10-year period, after
which time the HELOC recasts into a loan with a 20-year
amortization period. At the time of origination, the
borrower typically selects one of two minimum payment
options that will generally remain in effect during the
revolving period: a monthly payment of 1% of the
outstanding balance, or interest-only payments based on a
variable index (typically Prime). HELOCs originated by
Washington Mutual were generally revolving loans for a 10-
year period, after which time the HELOC converts to an
interest-only loan with a balloon payment at the end of the
loan’s term. Predominantly all HELOCs in the PCI portfolio
beyond the revolving period have been modified into fixed-
rate amortizing loans.
The Firm manages the risk of HELOCs during their revolving
period by closing or reducing the undrawn line to the extent
permitted by law when borrowers are experiencing financial