Portfolio analysis
Consumer loan balances declined during the year ended December 31, 2013, due to paydowns and the charge-off or liquidation of delinquent loans, partially offset by new mortgage and auto originations. Credit performance has improved across most portfolios but residential real estate charge-offs and delinquent loans remain elevated compared with pre-recessionary levels.
The following discussion relates to the specific loan and lending-related categories. PCI loans are generally excluded from individual loan product discussions 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 on pages 258–283 of this Annual Report.
Home equity: The home equity portfolio at December 31, 2013, was $57.9 billion, compared with $67.4 billion at December 31, 2012. The decrease in this portfolio primarily reflected loan paydowns and charge-offs. Early-stage delinquencies showed improvement from
December 31, 2012, for both senior and junior lien home equity loans. Late-stage delinquencies also improved from December 31, 2012, but continue to be elevated as improvement in the number of loans becoming severely delinquent was offset by higher average carrying value on these loans, reflecting improving collateral values. Senior lien nonaccrual loans were flat compared with the prior year while junior lien nonaccrual loans decreased in 2013.
Net charge-offs for both senior and junior lien home equity loans declined when compared with the prior year as a result of improvement in delinquencies and home prices, as well as the impact of prior year incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy.
Approximately 20% 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 half of the HELOANs are senior liens and the remainder are junior liens. 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 non-PCI HELOCs
outstanding was $50 billion at December 31, 2013. Based on the contractual terms of the loans, $30 billion of the non-PCI HELOCs outstanding are scheduled to recast at which time the borrower must begin to make fully
amortizing payments, of which, $7 billion, $8 billion and $7 billion are scheduled to recast in 2015, 2016 and 2017, respectively. However, of the $30 billion in non-PCI HELOCs scheduled to recast, approximately $14 billion are currently expected to recast, with the remaining $16 billion
representing loans to borrowers who are expected to prepay (including borrowers who appear to have the ability to refinance based on the borrower’s LTV ratio and FICO score) or are loans that are expected to charge-off. 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 and home prices, could have a significant impact on the expected and/or actual 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 or when the collateral does not support the loan amount. 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.
At December 31, 2013, the Firm estimated that its home equity portfolio contained approximately $2.3 billion of current junior lien loans where the borrower has a first mortgage loan that is either delinquent or has been modified (“high-risk seconds”), compared with $3.1 billion
JPMorgan Chase & Co./2013 Annual Report 123
at December 31, 2012. Such loans are considered to pose a higher risk of default than that of junior lien loans for which the senior lien 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). The estimated balance of these high-risk seconds may vary from quarter to quarter for reasons such as the movement of related senior liens into and out of the 30+ day delinquency bucket.
Current high risk junior liens
December 31, (in billions) 2013 2012
Junior liens subordinate to:
Modified current senior lien $ 0.9 $ 1.1
Senior lien 30 – 89 days delinquent 0.6 0.9 Senior lien 90 days or more delinquent(a) 0.8 1.1 Total current high risk junior liens $ 2.3 $ 3.1 (a) Junior liens subordinate to senior liens that are 90 days or more past
due are classified as nonaccrual loans. At both December 31, 2013 and 2012, excluded approximately $100 million of junior liens that are performing but not current, which were also placed on nonaccrual in accordance with the regulatory guidance.
Of the estimated $2.3 billion of high-risk junior liens at December 31, 2013, the Firm owns approximately 5% and services approximately 25% of the related senior lien loans to the same borrowers. The performance of the Firm’s junior lien loans is generally consistent regardless of whether the Firm owns, services or does not own or service the senior lien. The increased probability of default associated with these higher-risk junior lien loans was considered in estimating the allowance for loan losses.
Mortgage: Mortgage loans at December 31, 2013, including prime, subprime and loans held-for-sale, were
$94.9 billion, compared with $84.5 billion at December 31, 2012. The mortgage portfolio increased in 2013 as
retained prime mortgage originations, which represent loans with high credit quality, were greater than paydowns and the charge-off or liquidation of delinquent loans. Net charge-offs decreased from the prior year reflecting continued home price improvement and favorable delinquency trends. Delinquency levels remain elevated compared with pre-recessionary levels.
Prime mortgages, including option adjustable-rate mortgages (“ARMs”) and loans held-for-sale, were $87.8 billion at December 31, 2013, compared with $76.3 billion at December 31, 2012. Prime mortgage loans increased as retained originations exceeded paydowns, the run-off of option ARM loans and the charge-off or liquidation of delinquent loans. Excluding loans insured by U.S.
government agencies, both early-stage and late-stage delinquencies showed improvement from December 31, 2012. Nonaccrual loans decreased from the prior year but remain elevated as a result of elongated foreclosure processing timelines. Net charge-offs continued to improve, as a result of improvement in delinquencies and home prices.
At December 31, 2013 and 2012, the Firm’s prime
mortgage portfolio included $14.3 billion and $15.6 billion, respectively, of mortgage loans insured and/or guaranteed by U.S. government agencies, of which $9.6 billion and
$11.8 billion, respectively, were 30 days or more past due, including $8.4 billion and $10.6 billion, respectively, which were 90 days or more past due. Following the Firm’s settlement regarding loans insured under federal mortgage insurance programs overseen by FHA, HUD, and VA, the Firm will continue to monitor exposure on future claim payments for government insured loans; however, any financial impact related to exposure on future claims is not expected to be significant.
At December 31, 2013 and 2012, the Firm’s prime
mortgage portfolio included $15.6 billion and $16.0 billion, respectively, of interest-only loans, which represented 18%
and 21% of the prime mortgage portfolio, respectively.
These loans have an interest-only payment period generally followed by an adjustable-rate or fixed-rate fully amortizing payment to maturity and are typically originated as higher-balance loans to higher-income borrowers. The decrease in this portfolio was primarily due to voluntary prepayments, as borrowers are generally refinancing into lower rate products. To date, losses on this portfolio generally have been consistent with the broader prime mortgage portfolio and the Firm’s expectations. The Firm continues to monitor the risks associated with these loans.
Non-PCI option ARM loans acquired by the Firm as part of the Washington Mutual transaction, which are included in the prime mortgage portfolio, were $5.6 billion and $6.5 billion and represented 6% and 9% of the prime mortgage portfolio at December 31, 2013 and 2012, respectively.
The decrease in option ARM loans resulted from portfolio runoff. As of December 31, 2013, approximately 4% of option ARM borrowers were delinquent. Substantially all of the remaining borrowers were making amortizing
payments, although such payments are not necessarily fully amortizing and may be subject to risk of payment shock due to future payment recast. The Firm estimates the following balances of option ARM loans will undergo a payment recast that results in a payment increase: $807 million in 2014,
$675 million in 2015 and $164 million in 2016. As the Firm’s option ARM loans, other than those held in the PCI portfolio, are primarily loans with lower LTV ratios and higher borrower FICO scores, it is possible that many of these borrowers will be able to refinance into a lower rate product, which would reduce this payment recast risk. To date, losses realized on option ARM loans that have undergone payment recast have been immaterial and consistent with the Firm’s expectations.
Subprime mortgages at December 31, 2013, were $7.1 billion, compared with $8.3 billion at December 31, 2012.
The decrease was due to portfolio runoff. Early-stage and late-stage delinquencies as well as nonaccrual loans have improved from December 31, 2012, but remain at elevated
Management’s discussion and analysis
124 JPMorgan Chase & Co./2013 Annual Report
levels. Net charge-offs continued to improve as a result of improvement in delinquencies and home prices.
Auto: Auto loans at December 31, 2013, were $52.8 billion, compared with $49.9 billion at December 31, 2012.
Loan balances increased due to new originations, partially offset by paydowns and payoffs. Delinquencies and nonaccrual loans improved compared with December 31, 2012. Net charge-offs decreased from the prior year due to prior year incremental charge-offs reported in accordance with regulatory guidance on certain loans discharged under Chapter 7 bankruptcy. Loss levels are considered low as a result of favorable trends in both loss frequency and loss severity, mainly due to enhanced underwriting standards and a strong used car market. The auto loan portfolio reflected a high concentration of prime-quality credits.
Business banking: Business banking loans at December 31, 2013, were $19.0 billion, compared with $18.9 billion at December 31, 2012. Business Banking loans primarily include loans that are collateralized, often with personal loan guarantees, and may also include Small Business Administration guarantees. Nonaccrual loans showed improvement from December 31, 2012. Net charge-offs declined for the year ended December 31, 2013, compared with the year ended December 31, 2012.
Student and other: Student and other loans at
December 31, 2013, were $11.6 billion, compared with
$12.2 billion at December 31, 2012. The decrease was primarily due to runoff of the student loan portfolio. Other loans primarily include other secured and unsecured consumer loans. Nonaccrual loans increased compared with December 31, 2012, while net charge-offs decreased for the year ended December 31, 2013, compared with the prior year.
Purchased credit-impaired loans: PCI loans at
December 31, 2013, were $53.1 billion, compared with
$59.7 billion at December 31, 2012. This portfolio represents loans acquired in the Washington Mutual transaction, which were recorded at fair value at the time of acquisition. PCI 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.
Substantially all undrawn HELOCs within the revolving period have been blocked.
As of December 31, 2013, approximately 19% of the option ARM PCI loans were delinquent and approximately 54% have been modified into fixed-rate, fully amortizing loans. Substantially all of the remaining loans are making amortizing payments, although such payments are not necessarily fully amortizing. This latter group of loans are subject to the risk of payment shock due to future payment recast.
Default rates generally increase on option ARM loans when payment recast results in a payment increase. The expected increase in default rates is considered in the Firm’s
quarterly impairment assessment. The cumulative amount of unpaid interest added to the unpaid principal balance of the option ARM PCI pool was $724 million and $879 million at December 31, 2013, and December 31, 2012,
respectively. The Firm estimates the following balances of option ARM PCI loans will undergo a payment recast that results in a payment increase: $487 million in 2014, $810 million in 2015 and $710 million in 2016.
The following table provides a summary of lifetime principal loss estimates included in both the nonaccretable difference and the allowance for loan losses.
Summary of lifetime principal loss estimates
December 31, (in billions)
Lifetime loss estimates(a)
LTD liquidation losses(b)
2013 2012 2013 2012
Home equity $ 14.7 $ 14.9 $ 12.1 $ 11.5
Prime mortgage 3.8 4.2 3.3 2.9
Subprime mortgage 3.3 3.6 2.6 2.2
Option ARMs 10.2 11.3 8.8 8.0
Total $ 32.0 $ 34.0 $ 26.8 $ 24.6
(a) Includes the original nonaccretable difference established in purchase accounting of $30.5 billion for principal losses only plus additional principal losses recognized subsequent to acquisition through the provision and allowance for loan losses. The remaining nonaccretable difference for principal losses only was $3.8 billion and $5.8 billion at December 31, 2013 and 2012, respectively.
(b) Life-to-date (“LTD”) liquidation losses represent both realization of loss upon loan resolution and any principal forgiven upon modification. LTD liquidation losses included $53 million of write-offs of prime mortgages for the year ended December 31, 2013.
Lifetime principal loss estimates declined from
December 31, 2012, to December 31, 2013, reflecting improvement in home prices and delinquencies. The decline in lifetime principal loss estimates during the year ended December 31, 2013, resulted in a $1.5 billion reduction of the PCI allowance for loan losses ($1.0 billion related to option ARM loans, $200 million to subprime mortgage,
$150 million to home equity loans and $150 million to prime mortgage). In addition, for the year ended December 31, 2013, PCI write-offs of $53 million were recorded against the prime mortgage allowance for loan losses. For further information about the Firm’s PCI loans, including write-offs, see Note 14 on pages 258–283 of this Annual Report.
As a result of reserve actions and PCI prime mortgage write-offs, the allowance for loan loss for the PCI portfolio declined from $5.7 billion at December 31, 2012, to $4.2 billion at December 31, 2013. The allowance for loan losses decreased from $1.5 billion to $494 million for the option ARM portfolio, from $1.9 billion to $1.7 billion for prime mortgage, from $380 million to $180 million for subprime mortgage and from $1.9 billion to $1.8 billion for the home equity portfolio from December 31, 2012 to December 31, 2013.
JPMorgan Chase & Co./2013 Annual Report 125
Geographic composition of residential real estate loans
At December 31, 2013, California had the greatest concentration of residential real estate loans with 25% of the total retained residential real estate loan portfolio, excluding mortgage loans insured by U.S. government agencies and PCI loans, compared with 24% at December 31, 2012. Of these loans, $85.9 billion, or 62%, were concentrated in California, New York, Illinois, Florida and Texas at December 31, 2013, compared with $82.4 billion, or 60%, at December 31, 2012. The unpaid principal balance of PCI loans concentrated in these five states represented 74% of total PCI loans at December 31, 2013, compared with 73% at December 31, 2012.
Current estimated LTVs of residential real estate loans
The current estimated average LTV ratio for residential real estate loans retained, excluding mortgage loans insured by U.S. government agencies and PCI loans, was 75% at December 31, 2013, compared with 81% at December 31, 2012. Of these loans, 9% had a current estimated LTV ratio greater than 100%, and 2% had a current estimated LTV ratio greater than 125% at December 31, 2013, compared with 20% and 8%, respectively, at December 31, 2012.
Although home prices continue to recover, the decline in home prices since 2007 has had a significant impact on the collateral values underlying the Firm’s residential real estate loan portfolio. In general, the delinquency rate for loans with high LTV ratios is greater than the delinquency rate for loans in which the borrower has equity in the collateral. While a large portion of the loans with current estimated LTV ratios greater than 100% continue to pay and are current, the continued willingness and ability of these borrowers to pay remains a risk.
Management’s discussion and analysis
126 JPMorgan Chase & Co./2013 Annual Report
The following table for PCI loans presents the current estimated LTV ratios, as well as the ratios of the carrying value of the underlying loans to the current estimated collateral value. Because such loans were initially measured at fair value, the ratios of the carrying value to the current estimated collateral value will be lower than the current estimated LTV ratios, which are based on the unpaid principal balances. The estimated collateral values used to calculate these ratios do not represent actual appraised loan-level collateral values; as such, the resulting ratios are necessarily imprecise and should therefore be viewed as estimates.
LTV ratios and ratios of carrying values to current estimated collateral values – PCI loans
2013 2012
December 31, (in millions, except ratios)
Unpaid principal
balance
Current estimated LTV ratio(a)
Net carrying
value(c)
Ratio of net carrying value to current estimated
collateral value(c)
Unpaid principal
balance
Current estimated LTV ratio(a)
Net carrying
value(c)
Ratio of net carrying value to current estimated
collateral value(c)
Home equity $ 19,830 90%(b) $ 17,169 78% $ 22,343 111%(b) $ 19,063 95%
Prime mortgage 11,876 83 10,312 72 13,884 104 11,745 88
Subprime mortgage 5,471 91 3,995 66 6,326 107 4,246 72
Option ARMs 19,223 82 17,421 74 22,591 101 18,972 85
(a) Represents the aggregate unpaid principal balance of loans divided by the estimated current property value. Current property values are estimated at least quarterly based on home valuation models that utilize nationally recognized home price index valuation estimates; such models incorporate actual data to the extent available and forecasted data where actual data is not available.
(b) Represents current estimated combined LTV for junior home equity liens, which considers all available lien positions, as well as unused lines, related to the property. All other products are presented without consideration of subordinate liens on the property.
(c) Net carrying value includes the effect of fair value adjustments that were applied to the consumer PCI portfolio at the date of acquisition and is also net of the allowance for loan losses at December 31, 2013 and 2012 of $1.8 billion and $1.9 billion for home equity, $1.7 billion and $1.9 billion for prime mortgage, $494 million and $1.5 billion for option ARMs, and $180 million and $380 million for subprime mortgage, respectively.
The current estimated average LTV ratios were 85% and 103% for California and Florida PCI loans, respectively, at December 31, 2013, compared with 110% and 125%, respectively, at December 31, 2012. Average LTV ratios have declined consistent with recent improvement in home prices. Although home prices have improved, home prices in California and Florida are still lower than at the peak of the housing market; this continues to negatively contribute to current estimated average LTV ratios and the ratio of net carrying value to current estimated collateral value for loans in the PCI portfolio. Of the total PCI portfolio, 26%
had a current estimated LTV ratio greater than 100%, and 7% had a current LTV ratio of greater than 125% at December 31, 2013, compared with 55% and 24%, respectively, at December 31, 2012.
While the current estimated collateral value is greater than the net carrying value of PCI loans, the ultimate
performance of this portfolio is highly dependent on borrowers’ behavior and ongoing ability and willingness to continue to make payments on homes with negative equity, as well as on the cost of alternative housing. For further information on the geographic composition and current estimated LTVs of residential real estate – non-PCI and PCI loans, see Note 14 on pages 258–283 of this Annual Report.
Loan modification activities – residential real estate loans For both the Firm’s on–balance sheet loans and loans serviced for others, more than 1.5 million mortgage modifications have been offered to borrowers and approximately 734,000 have been approved since the beginning of 2009. Of these, more than 725,000 have achieved permanent modification as of December 31,
2013. Of the remaining modifications offered, 9% are in a trial period or still being reviewed for a modification, while 91% have dropped out of the modification program or otherwise were deemed not eligible for final modification.
The Firm is participating in the U.S. Treasury’s Making Home Affordable (“MHA”) programs and is continuing to offer its other loss-mitigation programs to financially distressed borrowers who do not qualify for the U.S. Treasury’s programs. The MHA programs include the Home Affordable Modification Program (“HAMP”) and the Second Lien Modification Program (“2MP”). The Firm’s other loss-mitigation programs for troubled borrowers who do not qualify for HAMP include the traditional modification programs offered by the GSEs and other governmental agencies, as well as the Firm’s proprietary modification programs, which include concessions similar to those offered under HAMP and 2MP but with expanded eligibility criteria. In addition, the Firm has offered specific targeted modification programs to higher risk borrowers, many of whom were current on their mortgages prior to
modification. For further information about how loans are modified, see Note 14, Loan modifications, on pages 268–
273 of this Annual Report.
Loan modifications under HAMP and under one of the Firm’s proprietary modification programs, which are largely modeled after HAMP, require at least three payments to be made under the new terms during a trial modification period, and must be successfully re-underwritten with income verification before the loan can be permanently modified. In the case of specific targeted modification programs, re-underwriting the loan or a trial modification period is generally not required, unless the targeted loan is