JP Morgan Chase 2015 Annual Report Download - page 286

Notes to consolidated financial statements
276 JPMorgan Chase & Co./2015 Annual Report
The fair value of MSRs is sensitive to changes in interest
rates, including their effect on prepayment speeds. MSRs
typically decrease in value when interest rates decline
because declining interest rates tend to increase
prepayments and therefore reduce the expected life of the
net servicing cash flows that consist of the MSR asset.
Conversely, securities (e.g., mortgage-backed securities),
principal-only certificates and certain derivatives (i.e.,
those for which the Firm receives fixed-rate interest
payments) increase in value when interest rates decline.
JPMorgan Chase uses combinations of derivatives and
securities to manage changes in the fair value of MSRs. The
intent is to offset any interest-rate related changes in the
fair value of MSRs with changes in the fair value of the
related risk management instruments.
The following table summarizes MSR activity for the years ended December 31, 2015, 2014 and 2013.
As of or for the year ended December 31, (in millions, except where otherwise noted) 2015 2014 2013
Fair value at beginning of period $ 7,436 $ 9,614 $ 7,614
MSR activity:
Originations of MSRs 550 757 2,214
Purchase of MSRs 435 11 1
Disposition of MSRs(a) (486) (209) (725)
Net additions 499 559 1,490
Changes due to collection/realization of expected cash flows (922) (911) (1,102)
Changes in valuation due to inputs and assumptions:
Changes due to market interest rates and other(b) (160) (1,608) 2,122
Changes in valuation due to other inputs and assumptions:
Projected cash flows (e.g., cost to service) (112) 133 109
Discount rates (10) (459) (e) (78)
Prepayment model changes and other(c) (123) 108 (541)
Total changes in valuation due to other inputs and assumptions (245) (218) (510)
Total changes in valuation due to inputs and assumptions $ (405) $ (1,826) $ 1,612
Fair value at December 31, $ 6,608 $ 7,436 $ 9,614
Change in unrealized gains/(losses) included in income related to MSRs
held at December 31, $ (405) $ (1,826) $ 1,612
Contractual service fees, late fees and other ancillary fees included in income $ 2,533 $ 2,884 $ 3,309
Third-party mortgage loans serviced at December 31, (in billions) $ 677 $ 756 $ 822
Servicer advances, net of an allowance
for uncollectible amounts, at December 31, (in billions)(d) $ 6.5 $ 8.5 $ 9.6
(a) For 2014 and 2013, predominantly represents excess MSRs transferred to agency-sponsored trusts in exchange for stripped mortgage backed securities (“SMBS”).
In each transaction, a portion of the SMBS was acquired by third parties at the transaction date; the Firm acquired and has retained the remaining balance of those
SMBS as trading securities. Also includes sales of MSRs.
(b) Represents both the impact of changes in estimated future prepayments due to changes in market interest rates, and the difference between actual and expected
prepayments.
(c) Represents changes in prepayments other than those attributable to changes in market interest rates.
(d) Represents amounts the Firm pays as the servicer (e.g., scheduled principal and interest, taxes and insurance), which will generally be reimbursed within a short
period of time after the advance from future cash flows from the trust or the underlying loans. The Firm’s credit risk associated with these servicer advances is
minimal because reimbursement of the advances is typically senior to all cash payments to investors. In addition, the Firm maintains the right to stop payment to
investors if the collateral is insufficient to cover the advance. However, certain of these servicer advances may not be recoverable if they were not made in
accordance with applicable rules and agreements.
(e) For the year ending December 31, 2014, the negative impact was primarily related to higher capital allocated to the Mortgage Servicing business, which, in turn,
resulted in an increase in the OAS. The resulting OAS assumption was consistent with capital and return requirements the Firm believed a market participant would
consider, taking into account factors such as the operating risk environment and regulatory and economic capital requirements.