eTrade 2011 Annual Report Download - page 64

and securities varies based on many factors including the size of the transaction, the credit characteristics of the
borrower, features of the loan product or security, the contractual terms of the related documents and the
availability and quality of collateral. Credit risk is one of the most common risks in financial services and is one
of our most significant risks.
Credit risk is monitored by our Credit Risk Committee, whose objective is to monitor current and expected
market conditions and the associated probable impact on the Company’s credit risk. The Credit Risk Committee
establishes credit risk guidelines in accordance with the Company’s strategic objectives and existing policies.
The Credit Risk Committee reviews investment and lending activities involving credit risk to ensure consistency
with those established guidelines. These reviews involve an analysis of portfolio balances, delinquencies, losses,
recoveries, default management and collateral liquidation performance, as well as any credit risk mitigation
efforts relating to the portfolios. In addition, the Credit Risk Committee reviews and approves credit related
counterparties engaged in financial transactions with the Company.
Loss Mitigation
We have a credit management team that focuses on the mitigation of potential losses in the loan portfolio.
Through a variety of strategies, including voluntary line closures, automatically freezing lines on all delinquent
accounts, and freezing lines on loans with materially reduced home equity, we have reduced our exposure to
open home equity lines from a high of over $7 billion in 2007 to $0.4 billion as of December 31, 2011.
We also have an initiative to assess our servicing relationships and where appropriate transfer certain
mortgage loans to servicers that specialize in managing troubled assets. We believe this initiative will improve
the credit performance of the loans transferred in future periods when compared to the expected credit
performance of these same loans if they had not been transferred. These specialized servicers focus on loan
modifications and pursue trial modifications for loans that are more than 180 days delinquent. We completed a
transfer of $2.2 billion of mortgage loans during the third and fourth quarters of 2011, which resulted in a total of
$3.0 billion of our mortgage loan portfolio at servicers that specialize in managing troubled assets as of
December 31, 2011.
We also have a loan modification program that focuses on the mitigation of potential losses in the loan
portfolio. We consider modifications in which we make an economic concession to a borrower experiencing
financial difficulty a TDR. During the year ended December 31, 2011, we modified $569.8 million and $121.8
million of one- to four-family and home equity loans, respectively, in which the modification was considered a
TDR. As we transition from the OTS to the OCC, we are working to align certain policies and procedures with
the guidance from the OCC. As a result, we suspended certain modification programs that will require changes
and we expect a decrease in the volume of TDRs in 2012. Trial modifications are classified immediately as TDRs
and continue to be reported as delinquent until the successful completion of the trial period, which is typically 90
days. The loan is then classified as current and becomes a permanent modification. There is no impact on the
allowance for loan losses for trial modifications as they were written down to the expected recovery value when
they became 180 days past due.
We also processed minor modifications on a number of loans through traditional collections actions taken in
the normal course of servicing delinquent accounts. These actions typically result in an insignificant delay in the
timing of payments; therefore, we do not consider such activities to be economic concessions to the borrowers.
As of December 31, 2011 and 2010, we had $44.7 million and $49.9 million of mortgage loans, respectively, in
which the modification was not considered a TDR due to the insignificant delay in the timing of payments.
Approximately 8% of these loans were classified as nonperforming for both of the years ended December 31,
2011 and 2010.
We continue to review the mortgage loan portfolio in order to identify loans to be repurchased by the
originator. Our review is primarily focused on identifying loans with violations of transaction representations and
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