eTrade 2009 Annual Report Download - page 66

Processing issues and external events may result in opportunity loss depending on the situation. These types
of losses include issues resulting from human error, equipment failures, significant weather events or other
related types of events. External events resulting in actual losses could be due to Internet performance issues,
litigation, change in public policy and our reputation.
CONCENTRATIONS OF CREDIT RISK
Loans
We track and review many factors to predict and monitor credit risk in our loan portfolio, which is primarily
made up of loans secured by residential real estate. These factors, which are documented at the time of
origination, include: borrowers’ debt-to-income ratio, borrowers’ credit scores, housing prices, documentation
type, occupancy type, and loan type. We also review estimated current loan-to-value (“LTV”) ratios when
monitoring credit risk in our loan portfolios. In economic conditions in which housing prices generally
appreciate, we believe that loan type, LTV ratios and credit scores are the key factors in determining future loan
performance. In the current housing market with declining home prices and less credit available for refinance, we
believe the LTV ratio becomes a more important factor in predicting and monitoring credit risk.
We believe certain categories of loans inherently have a higher level of credit risk due to characteristics of
the borrower and/or features of the loan. Two of these categories are sub-prime and option adjustable rate
mortgages (“ARM”) loans. As a general matter, we did not originate or purchase these loans to hold on our
balance sheet; however, in the normal course of purchasing large pools of real estate loans, we invariably ended
up acquiring a de minimis amount of sub-prime loans. As of December 31, 2009, sub-prime real estate loans
represented less than one-fifth of one percent of our total real estate loan portfolio and we held no option ARM
loans.
As noted above, we believe loan type, LTV ratios and borrowers’ credit scores are key determinants of
future loan performance. Our home equity loan portfolio is primarily second lien loans(1) on residential real estate
properties, which have a higher level of credit risk than first lien mortgage loans. We believe home equity loans
with a combined loan-to-value (“CLTV”) of 90% or higher or a Fair Isaac Credit Organization (“FICO”) score
below 700 are the loans with the highest levels of credit risk in our portfolios.
(1) Approximately 13% of the home equity portfolio is in the first lien position. For home equity loans that are in a second lien position, we
also hold the first lien position on the same residential real estate property for less than 1% of the loans in this portfolio.
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