JP Morgan Chase 2012 Annual Report Download - page 303

JPMorgan Chase & Co./2012 Annual Report 313
To estimate the Firm’s mortgage repurchase liability arising
from breaches of representations and warranties, the Firm
considers:
(i) the level of outstanding unresolved repurchase
demands,
(ii) estimated probable future repurchase demands
considering information about file requests, delinquent
and liquidated loans, resolved and unresolved
mortgage insurance rescission notices and the Firm’s
historical experience,
(iii) the potential ability of the Firm to cure the defects
identified in the repurchase demands (“cure rate”),
(iv) the estimated severity of loss upon repurchase of the
loan or collateral, 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 mortgage
repurchase liability of $2.8 billion and $3.6 billion, as of
December 31, 2012 and 2011, respectively, which is
reported in accounts payable and other liabilities net of
probable recoveries from third-party originators of $441
million and $577 million at December 31, 2012 and 2011,
respectively. The Firm’s mortgage repurchase liability is
intended to cover losses associated with all loans previously
sold in connection with loan sale and securitization
transactions with the GSEs, regardless of when those losses
occur or how they are ultimately resolved (e.g., repurchase,
make-whole payment). The liability related to all
repurchase demands associated with private-label
securitizations is separately evaluated by the Firm in
establishing its litigation reserves.
Substantially all of the estimates and assumptions
underlying the Firm’s established methodology for
computing its recorded mortgage repurchase liability —
including the amount of probable future demands from the
GSEs (based on both historical experience and the Firm’s
expectations about the GSEs future behavior), the ability of
the Firm to cure identified defects, the severity of loss upon
repurchase or foreclosure, and recoveries from third parties
— require application of a significant level of management
judgment.
While the Firm uses the best information available to it in
estimating its mortgage repurchase liability, the estimation
process is inherently uncertain and imprecise and,
accordingly, losses in excess of the amounts accrued as of
December 31, 2012, are reasonably possible. The Firm
believes the estimate of the range of reasonably possible
losses, in excess of its established repurchase liability, is
from $0 to approximately $0.9 billion at December 31,
2012. This estimated range of reasonably possible loss
considers the Firm’s GSE-related exposure based on an
assumed peak to trough decline in home prices of 40%,
which is an additional 10 percentage point decline in home
prices beyond the Firm’s current assumptions (which were
derived from a nationally recognized home price index).
Although the Firm does not consider a further decline in
home prices of this magnitude likely to occur, such a decline
could increase the levels of loan delinquencies, which may,
in turn, increase the level of repurchase demands from the
GSEs and potentially result in additional repurchases of
loans at greater loss severities; each of these factors could
affect the Firm’s mortgage repurchase liability.
The following table summarizes the change in the mortgage
repurchase liability for each of the periods presented.
Summary of changes in mortgage repurchase liability(a)
Year ended December 31,
(in millions) 2012 2011 2010
Repurchase liability at beginning of
period $ 3,557 $ 3,285 $ 1,705
Realized losses(b) (1,158) (1,263) (1,423)
Provision for repurchase losses(c) 412 1,535 3,003
Repurchase liability at end of
period $ 2,811 $ 3,557 $ 3,285
(a) All mortgage repurchase demands associated with private-label
securitizations are separately evaluated by the Firm in establishing its
litigation reserves.
(b) Includes principal losses and accrued interest on repurchased loans,
“make-whole” settlements, settlements with claimants, and certain
related expense. Make-whole settlements were $524 million, $640
million and $632 million, for the years ended December 31, 2012,
2011 and 2010, respectively.
(c) Includes $112 million, $52 million and $47 million of provision
related to new loan sales for the years ended December 31, 2012,
2011 and 2010, respectively.