JP Morgan Chase 2012 Annual Report Download - page 75

JPMorgan Chase & Co./2012 Annual Report 85
Net production revenue includes net gains or losses on
originations and sales of prime and subprime mortgage loans,
other production-related fees and losses related to the
repurchase of previously-sold loans.
Net mortgage servicing revenue includes the following
components:
(a) Operating revenue comprises:
– gross income earned from servicing third-party mortgage
loans including stated service fees, excess service fees and
other ancillary fees; and
– modeled MSR asset amortization (or time decay).
(b) Risk management comprises:
– changes in MSR asset fair value due to market-based
inputs such as interest rates, as well as updates to
assumptions used in the MSR valuation model; and
– changes in derivative fair value and other, which
represents changes in the fair value of derivative
instruments used to offset the impact of changes in
interest rates to the MSR valuation model.
Mortgage origination channels comprise the following:
Retail – Borrowers who buy or refinance a home through direct
contact with a mortgage banker employed by the Firm using a
branch office, the Internet or by phone. Borrowers are
frequently referred to a mortgage banker by a banker in a Chase
branch, real estate brokers, home builders or other third parties.
Wholesale – Third-party mortgage brokers refer loan application
packages to the Firm. The Firm then underwrites and funds the
loan. Brokers are independent loan originators that specialize in
counseling applicants on available home financing options, but
do not provide funding for loans. Chase materially eliminated
broker-originated loans in 2008, with the exception of a small
number of loans guaranteed by the U.S. Department of
Agriculture under its Section 502 Guaranteed Loan program that
serves low-and-moderate income families in small rural
communities.
Correspondent – Banks, thrifts, other mortgage banks and other
financial institutions that sell closed loans to the Firm.
Correspondent negotiated transactions (“CNTs”) – Mid-to-
large-sized mortgage lenders, banks and bank-owned mortgage
companies sell servicing to the Firm on an as-originated basis
(excluding sales of bulk servicing transactions). These
transactions supplement traditional production channels and
provide growth opportunities in the servicing portfolio in periods
of stable and rising interest rates.
2012 compared with 2011
Mortgage Production pretax income was $3.6 billion, an
increase of $2.6 billion compared with the prior year.
Mortgage production-related revenue, excluding repurchase
losses, was $6.6 billion, an increase of $2.3 billion, or 55%,
from the prior year. These results reflected wider margins,
driven by favorable market conditions, and higher volumes
due to historically low interest rates and the Home
Affordable Refinance Programs (“HARP”). Production
expense, including credit costs, was $2.7 billion, an
increase of $852 million, or 45%, reflecting higher volumes
and additional litigation costs. Repurchase losses were
$272 million, compared with $1.3 billion in the prior year.
The current-year reflected a reduction in the repurchase
liability of $683 million compared with a build of $213
million in the prior year, primarily driven by improved cure
rates on Agency repurchase demands and lower
outstanding repurchase demand pipeline. For further
information, see Mortgage repurchase liability on pages
111–115 of this Annual Report.
Mortgage Servicing reported a pretax loss of $1.2 billion,
compared with a pretax loss of $3.8 billion in the prior year.
Mortgage servicing revenue, including amortization, was
$3.0 billion, an increase of $337 million, or 13%, from the
prior year, driven by lower mortgage servicing rights
(“MSR”) asset amortization expense as a result of lower
MSR asset value, partially offset by lower loan servicing
revenue due to the decline in the third-party loans serviced.
MSR risk management income was $616 million, compared
with a loss of $1.6 billion in the prior year. The prior year
MSR risk management loss was driven by refinements to the
valuation model and related inputs. See Note 17 on pages
291–295 of this Annual Report for further information
regarding changes in value of the MSR asset and related
hedges. Servicing expense was $4.7 billion, down 2% from
the prior year, but elevated in both the current and prior
year primarily due to higher default servicing costs.
Real Estate Portfolios pretax income was $2.9 billion,
compared with a pretax loss of $504 million in the prior
year. The improvement was driven by a benefit from the
provision for credit losses, reflecting the continued
improvement in credit trends, partially offset by lower net
revenue. Net revenue was $4.1 billion, down $500 million,
or 11%, from the prior year. The decrease was driven by a
decline in net interest income as a result of lower loan
balances due to portfolio runoff. The provision for credit
losses reflected a benefit of $509 million, compared with a
provision expense of $3.6 billion in the prior year. The
current-year provision reflected a $3.9 billion reduction in
the allowance for loan losses due to improved delinquency
trends and lower estimated losses. Current-year net charge-
offs totaled $3.3 billion, including $744 million of charge-
offs, related to regulatory guidance, compared with $3.8
billion in the prior year. See Consumer Credit Portfolio on
pages 138–149 of this Annual Report for the net charge-off
amounts and rates. Nonaccrual loans were $7.9 billion,
compared with $5.9 billion in the prior year. Excluding the
impact of certain regulatory guidance, nonaccrual loans
would have been $4.9 billion at December 31, 2012. For
more information on the reporting of Chapter 7 loans and
performing junior liens that are subordinate to senior liens
that are 90 days or more past due as nonaccrual, see
Consumer Credit Portfolio on pages 138–149 of this Annual
Report. Noninterest expense was $1.7 billion, up $132
million, or 9%, compared with the prior year due to an
increase in servicing costs.