JP Morgan Chase 2013 Annual Report Download - page 296

Notes to consolidated financial statements
302 JPMorgan Chase & Co./2013 Annual Report
During the year ended December 31, 2011, the fair value
of the MSR decreased by $6.4 billion. This decrease was
predominantly due to a decline in market interest rates,
which resulted in a loss in fair value of $5.4 billion. These
losses were offset by gains of $5.6 billion on derivatives
used to hedge the MSR asset; these derivatives are
recognized on the Consolidated Balance Sheets separately
from the MSR asset. Also contributing to the decline in fair
value of the MSR asset was a $1.7 billion decrease related
to revised cost to service and ancillary income assumptions
incorporated in the MSR valuation. The increased cost to
service assumptions reflected the estimated impact of
higher servicing costs to enhance servicing processes,
particularly loan modification and foreclosure procedures,
including costs to comply with Consent Orders entered into
with banking regulators. The increase in the cost to service
assumption contemplated significant and prolonged
increases in staffing levels in the core and default servicing
functions. The decreased ancillary income assumption was
similarly related to a reassessment of business practices in
consideration of the Consent Orders and the existing
industry-wide regulatory environment, which was broadly
affecting market participants.
Also in the fourth quarter of 2011, the Firm revised its OAS
assumption and updated its proprietary prepayment model;
these changes had generally offsetting effects. The Firm’s
OAS assumption is based upon capital and return
requirements that the Firm believes a market participant
would consider, taking into account factors such as the
pending Basel III capital rules. Consequently, the OAS
assumption for the Firm’s portfolio increased by
approximately 400 basis points and decreased the fair
value of the MSR asset by approximately $1.2 billion.
Finally, in the fourth quarter of 2011, the Firm further
enhanced its proprietary prepayment model to incorporate:
(i) the impact of the Home Affordable Refinance Program
(“HARP”) 2.0, and (ii) assumptions that to limit modeled
refinancings due to the combined influences of relatively
strict underwriting standards and reduced levels of
expected home price appreciation. In the aggregate, these
refinements increased the fair value of the MSR asset by
approximately $1.2 billion.