eTrade 2012 Annual Report Download - page 13

the portfolio. In addition, changes in the underlying assumptions used, including discount rates and estimates of
future cash flows, could significantly affect the results of current or future fair value estimates.
Certain characteristics of our mortgage loan portfolio indicate an increased risk of loss. For example, at
December 31, 2012:
• approximately 50% and 60% of the one- to four-family and home equity loan portfolios, respectively,
had a current loan-to-value (“LTV”)/combined loan-to-value (“CLTV”) of greater than 100%;
• approximately 57% and 49% of the one- to four-family and home equity loan portfolios, respectively,
were originated with low or no documentation;
• borrowers with current FICO scores less than 700 consisted of approximately 39% and 37% of the one-
to four-family and home equity loan portfolios, respectively; and
• approximately 82% and 88% of the one- to four-family and home equity loan portfolios, respectively,
were purchased from a third party.
The foregoing factors are among the key items we track to predict and monitor credit risk in our mortgage
portfolio, together with loan type, housing prices, loan vintage and geographic location of the underlying
property. We believe the relative importance of these factors varies, depending upon economic conditions.
Home equity loans have certain characteristics that result in higher risk than first lien, amortizing one- to four-
family loans.
Approximately 85% of the home equity loan portfolio consists of second lien loans on residential real estate
properties. The average estimated current CLTV on our home equity loan portfolio was 114% as of
December 31, 2012. We hold both the first and second lien positions in less than 1% of the home equity loan
portfolio, exposing us to risk associated with the actions and inactions of the first lien lender.
We monitor our borrowers by refreshing FICO scores and CLTV information on a quarterly basis. We do
not receive complete data on the first lien positions of second lien home equity loans. In addition, we rely on
third party servicers to provide payment information on home equity loans, including which borrowers are
paying only the minimum amount due. We have incomplete information regarding the number of borrowers
paying only the minimum amounts, which impacts our ability to accurately report on whether borrowers are
repaying any principal during the draw period across the aggregate portfolio.
Home equity lines of credit convert to amortizing loans at the end of the draw period, which ranges from
five to ten years. At December 31, 2012, the vast majority of the home equity line of credit portfolio had not
converted from the interest-only draw period to an amortizing loan. In addition, approximately 80% of the home
equity line of credit portfolio will not begin amortizing until after 2014. As a result, we do not yet have sufficient
data relating to loan default and delinquency of amortizing home equity lines of credit to determine if the
performance is different than the trends observed for home equity lines of credit in an interest-only draw period.
We rely on third party service providers to perform certain functions.
We rely on third party service providers for certain technology, processing, servicing and support functions.
These third party service providers are also subject to operational and technology vulnerabilities, which may
impact our business. An interruption in or the cessation of service by any third party service provider and our
inability to make alternative arrangements in a timely manner could have a material impact on our business and
financial performance.
We do not directly service any of our loans and as a result, we rely on third party vendors and servicers to
provide information on our loan portfolio. From time to time we have discovered that these vendors and servicers
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