JP Morgan Chase 2015 Annual Report Download - page 126

Management’s discussion and analysis
116 JPMorgan Chase & Co./2015 Annual Report
(g) At December 31, 2015 and 2014, nonaccrual loans excluded: (1) mortgage loans insured by U.S. government agencies of $6.3 billion and $7.8 billion,
respectively, that are 90 or more days past due; and (2) student loans insured by U.S. government agencies under the FFELP of $290 million and $367
million, respectively, that are 90 or more days past due. These amounts have been excluded from nonaccrual loans based upon the government guarantee. In
addition, credit card loans are generally exempt from being placed on nonaccrual status, as permitted by regulatory guidance.
(h) Excludes PCI loans. The Firm is recognizing interest income on each pool of PCI loans as each of the pools is performing.
(i) Net charge-offs and net charge-off rates excluded $208 million and $533 million of write-offs of prime mortgages in the PCI portfolio for the years ended
December 31, 2015 and 2014. These write-offs decreased the allowance for loan losses for PCI loans. See Allowance for Credit Losses on pages 130–132 for
further details.
(j) Average consumer loans held-for-sale were $2.1 billion and $917 million, respectively, for the years ended December 31, 2015 and 2014. These amounts
were excluded when calculating net charge-off rates.
Consumer, excluding credit card
Portfolio analysis
Consumer loan balances increased during the year ended
December 31, 2015, predominantly due to originations of
high-quality prime mortgage loans that have been retained,
partially offset by paydowns and the charge-off or
liquidation of delinquent loans. Credit performance has
continued to improve across most portfolios as the economy
strengthened and home prices increased.
PCI loans are excluded from the following discussions of
individual loan products 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.
Home equity: The home equity portfolio declined from
December 31, 2014 primarily reflecting loan paydowns and
charge-offs. Both early-stage and late-stage delinquencies
declined from December 31, 2014. Net charge-offs for both
senior and junior lien home equity loans at December 31,
2015, declined when compared with the prior year as a
result of improvement in home prices and delinquencies,
but charge-offs remain elevated compared with pre-
recessionary levels.
At December 31, 2015, approximately 15% 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 60% of the HELOANs are senior
lien loans and the remainder are junior lien loans. 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.
The unpaid principal balance of HELOCs outstanding was
$41 billion at December 31, 2015. Since January 1, 2014,
approximately $8 billion of HELOCs have recast from
interest-only to fully amortizing payments; based upon
contractual terms, approximately $19 billion is scheduled
to recast in the future, consisting of $7 billion in 2016, $6
billion in 2017 and $6 billion in 2018 and beyond.
However, of the total $19 billion scheduled to recast in the
future, $13 billion is expected to actually recast; and the
remaining $6 billion represents loans to borrowers who are
expected to pre-pay or loans that are likely to charge-off
prior to recast. The Firm has considered this payment recast
risk in its allowance for loan losses based upon the
estimated amount of payment shock (i.e., the excess of the
fully-amortizing payment over the interest-only payment in
effect prior to recast) expected to occur at the payment
recast date, along with the corresponding estimated
probability of default and loss severity assumptions. Certain
factors, such as future developments in both unemployment
rates and home prices, could have a significant impact on
the performance of these 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 exhibiting a material
deterioration in their credit risk profile. The Firm will
continue to evaluate both the near-term and longer-term
repricing and recast risks inherent in its HELOC portfolio to
ensure that changes in the Firm’s estimate of incurred
losses are appropriately considered in the allowance for
loan losses and that the Firm’s account management
practices are appropriate given the portfolio’s risk profile.
High-risk seconds are junior lien loans where the borrower
has a senior lien loan that is either delinquent or has been
modified. Such loans are considered to pose a higher risk of
default than junior lien loans for which the senior lien loan
is neither delinquent nor modified. The Firm estimates the
balance of its total exposure to high-risk seconds on a
quarterly basis using internal data and loan level credit
bureau data (which typically provides the delinquency
status of the senior lien loan). The estimated balance of
these high-risk seconds may vary from quarter to quarter
for reasons such as the movement of related senior lien
loans into and out of the 30+ day delinquency bucket.