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Variable Interest Entities (VIEs)
The Bank deems all of its primary economic interests, including debt and equity investments, servicing fees, derivatives and/or other arrangements to be eligible variable interests in VIEs. The Bank’s other business segments are also involved with VIEs (both third-party and Bank-sponsored) but to a lesser extent. The business segment includes Asset & Wealth Management, Commercial and Corporate.
Bank-sponsored mortgage and other securitization trusts
JP Morgan has securitized its originated and purchased residential mortgages, commercial mortgages and other consumer loans primarily in Consumer and Community Banking (CCB) and Corporate and Investment Banking (CIB) businesses. Depending on the particular transaction and the respective company involved, the Bank may act as the servicer of the loans or retain certain beneficial interests in the securitization trusts.
The table below shows the total unpaid principal amount of assets held in Bank-sponsored private-label securitization entities, including those in which the Bank has continuing involvement, as well as those that are consolidated by the Bank. Continuing involvement includes loan servicing, holding senior interests or subordinated interests (including amounts required to be held according to credit risk retention rules), recourse or guarantee arrangements, and derivative contracts.
(In USD millions)
|
Principal Amount Outstanding |
JPMorgan Chase interest in securitized assets in nonconsolidated VIEs |
|||||||||||
|
Particulars |
Total assets held by securitization VIEs |
Assets held in consolidated securitization VIEs |
Assets held in nonconsolidated securitization VIEs with continuing involvement |
Trading assets |
Investment securities |
Other financial assets |
Total interests held by JPMorgan Chase |
|||||
|
March 31 2020 |
||||||||||||
|
Securitization-related |
||||||||||||
|
Residential Mortgage: |
||||||||||||
|
Prime/Alt-A and Option ARMs |
59,615 |
2,657 |
48,743 |
|||||||||
|
Subprime |
14,198 |
51 |
13,024 |
9 |
- |
- |
9 |
|||||
|
Commercial and Others* |
114,032 |
- |
94,361 |
989 |
1,197 |
273 |
2,459 |
|||||
|
Total |
187,845 |
2,708 |
156,128 |
1,586 |
2,324 |
273 |
4,183 |
|||||
|
December 31 2019 |
||||||||||||
|
Securitization-related |
||||||||||||
|
Residential Mortgage: |
||||||||||||
|
Prime/Alt-A and Option ARMs |
60,348 |
2,796 |
48,734 |
535 |
625 |
1,160 |
||||||
|
Subprime |
14,661 |
- |
13,490 |
7 |
- |
7 |
||||||
|
Commercial and Others* |
111,903 |
- |
80,878 |
785 |
773 |
241 |
1,799 |
|||||
|
Total |
186,912 |
2,796 |
143,102 |
1,327 |
1,398 |
241 |
2,966 |
|||||
*Commercial and Others Consists of securities backed by commercial real estate loans and non-mortgage-related consumer receivables purchased from third parties.
Loan Securitization
JP Morgan Chase and Co. adopted new accounting guidelines for VIEs in 2010. Prior to that, the Bank showed only maximum exposure to loss of VIEs. After the adoption of the new accounting guidelines, it revealed net liquidation losses on the securitized loans. The current net liquidation losses have significantly decreased significantly from the 2012 level. The net liquidation loss for 2019 was only $1,556 million compared to $13,396 million in 2012. The net liquidation loss decreased by 55.9% in 1st quarter of 2020 from the same quarter of the previous year. We expect this number to spike dramatically – considerably more than that of the 2008 – 2012 levels.
|
(In USD millions) |
||||||||||||||
|
Particulars |
December 31 2019 |
March 31 2020 |
June 30, 2020, E |
September 30, 2020, F |
||||||||||
|
Residential mortgage |
Commercial and other |
Residential mortgage |
Commercial and other |
Residential mortgage |
Commercial and other |
Residential mortgage |
Commercial and other |
|||||||
|
Principal securitized |
1,782 |
764 |
3,064 |
3,188 |
5,379 |
13,666 |
9,787 |
62,399 |
||||||
|
Q-o-Q Growth |
71.9% |
317.3% |
75.5% |
328.7% |
82.0% |
356.6% |
||||||||
|
Growth Rates |
5.0% |
3.6% |
8.5% |
8.5% |
||||||||||
Losses in VIEs
(In USD millions)
|
Particulars |
Losses in VIEs |
||||||||||
|
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
Q1 2019 |
Q2 2019 |
Q3 2019 |
Q4 2019 |
Q1 2020 |
|
|
Non-Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
Non- Consolidated |
|
|
Maximum exposure to loss |
88,900 |
56,900 |
|||||||||
|
Net liquidation losses |
|||||||||||
|
Securitized loans |
|||||||||||
|
Residential mortgage: |
|||||||||||
|
Prime mortgage |
- |
- |
9,333 |
6,257 |
5,650 |
6,850 |
157 |
171 |
146 |
105 |
99 |
|
Subprime mortgage |
- |
- |
7,123 |
3,598 |
3,086 |
3,013 |
144 |
167 |
145 |
76 |
86 |
|
Option ARMs |
- |
- |
2,287 |
2,305 |
1,907 |
2,268 |
- |
- |
- |
- |
- |
|
Commercial and other |
- |
- |
15 |
618 |
1,101 |
1,265 |
141 |
24 |
118 |
162 |
10 |
|
Total |
88,900 |
56,900 |
18,758 |
12,778 |
11,744 |
13,396 |
442 |
362 |
409 |
343 |
195 |
Delinquency Rate
The Bank’s loan portfolio is divided into three segments: Consumer excluding credit cards; Credit cards; and Wholesale. The consumer, excluding credit card portfolio segment, includes residential mortgage and home equity loans and lending-related commitments that are combined into a residential real estate class. The table below provides information on delinquency, which is the primary credit quality indicator for retained residential real estate loans.
Residential Real Estate Loan
(In USD millions)
|
Particulars |
Dec 31-2019 |
March 31 2020 |
June 30 2020 |
September 30 2020 |
||||||||
|
Revolving Loans |
Term Loans by Origination Year |
|||||||||||
|
Total |
Within the revolving period |
Converted to term loans |
Prior to 2016 |
2016 |
2017 |
2018 |
2019 |
Q1 2020 |
Total |
Q2 2020 E |
Q3 2020 F |
|
|
Loan delinquency |
||||||||||||
|
Current |
239,979 |
8,213 |
18,927 |
67,311 |
39,809 |
30,504 |
21,088 |
42,800 |
10,590 |
239,242 |
11,225 |
11,899 |
|
30–149 days past due |
1,910 |
7 |
444 |
1,368 |
57 |
33 |
11 |
7 |
- |
1,927 |
561 |
1,011 |
|
150 or more days past due |
1,428 |
13 |
260 |
877 |
9 |
11 |
10 |
- |
- |
1,180 |
- |
- |
|
Total retained loans |
243,317 |
8,233 |
19,631 |
69,556 |
39,875 |
30,548 |
21,109 |
42,807 |
10,590 |
242,349 |
11,787 |
12,910 |
|
% of 30+ days past due to total retained loans |
0.80% |
0.09% |
2.35% |
2.03% |
0.14% |
0.11% |
0.05% |
0.02% |
0.81% |
5.00% |
8.50% |
|
The delinquency rate as of December 31, 2019, was 0.80% and it increased to 0.81% in the 1st quarter of 2020. We have estimated the delinquency rate of residential real estate loan as 5.0% for the 2nd quarter of 2020 and forecasted 8.5% for the 3rd quarter of 2020. The delinquency rate is estimated as per the delinquency rate available for RMBS for May 2020, in the public domain.
Shifting of Assets to Level 3 (2020)
JPMorgan Chase & Co. carries a portion of its total assets and liabilities at fair value. These assets and liabilities are mostly carried at a fair value on recurring basis. Certain assets, liabilities and unfunded lending-related commitments are measured at a fair value on nonrecurring basis; i.e., they are not measured at fair value on an perpetual basis but are subject to fair value adjustments in certain circumstances.
Fair value is based on the quoted market prices or inputs, as available. If prices or quotes are not available, the fair value is based on valuation models and other valuation techniques that consider relevant transaction characteristics (maturity) and use, as inputs, observable or unobservable market parameters, including yield curves, interest rates, volatilities, prices (such as a commodity, equity or debt prices), correlations, foreign exchange rates and credit curves.
A three-level valuation hierarchy has been established under U.S. GAAP for disclosure of the fair value measurements. The valuation hierarchy is based on the observability of inputs to the valuation of an asset or liability as of the measurement date. The Bank classifies assets as level 3 when one or more inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The following tables include a roll-forward of the Consolidated balance sheets amounts for financial instruments classified by the Bank within level 3 of the fair value hierarchy for the three months ended March 31, 2020, and 2019.
(In USD millions)
|
Particulars |
Fair Value on January 1, 2020 |
Total realized/ unrealized gains/ (losses |
Purchases |
Sales |
Settlements |
Transfers into Level 3 |
Transfers out of Level 3 |
Fair Value at March 31, 2020 |
Change in unrealized gains/(losses) related to financial instruments held at March. 31 2020 |
|
Assets |
|||||||||
|
Trading Assets: |
|||||||||
|
Debt Instruments: |
|||||||||
|
Mortgage-Backed Securities: |
|||||||||
|
U.S. GSEs and government agencies |
797 |
(139) |
19 |
(116) |
(42) |
- |
- |
519 |
(131) |
|
Residential – nonagency |
23 |
(1) |
2 |
- |
- |
- |
- |
24 |
(1) |
|
Commercial – nonagency |
4 |
- |
1 |
- |
(1) |
1 |
(2) |
3 |
- |
|
Total mortgage-backed securities |
824 |
(140) |
22 |
(116) |
(43) |
1 |
(2) |
546 |
(132) |
|
Obligations of U.S. states and municipalities |
10 |
- |
- |
(1) |
- |
- |
- |
9 |
- |
|
Non-U.S. government debt securities |
155 |
(12) |
90 |
(57) |
- |
- |
(1) |
175 |
(10) |
|
Corporate debt securities |
558 |
(55) |
292 |
(42) |
- |
227 |
(27) |
953 |
(50) |
|
Loans |
1,382 |
(161) |
699 |
(162) |
(53) |
1,788 |
(139) |
3,354 |
(190) |
|
Asset-backed securities |
37 |
(2) |
36 |
(15) |
(1) |
- |
(3) |
52 |
(1) |
|
Total debt instruments |
2,966 |
(370) |
1,139 |
(393) |
(97) |
2,016 |
(172) |
5,089 |
(383) |
|
Equity Securities |
196 |
(38) |
10 |
(4) |
- |
82 |
(33) |
213 |
(39) |
|
Other |
232 |
(1) |
9 |
(5) |
(12) |
- |
(2) |
221 |
2 |
|
Total trading assets – debt and equity instruments |
3,394 |
(409) |
1,158 |
(402) |
(109) |
2,098 |
(207) |
5,523 |
(420) |
|
Net Derivative Receivables: |
|||||||||
|
Interest |
(332) |
642 |
66 |
(50) |
(241) |
(172) |
(49) |
(136) |
282 |
|
Credit |
(139) |
108 |
18 |
(128) |
(33) |
60 |
3 |
(111) |
65 |
|
Foreign Exchange |
(607) |
(339) |
38 |
(4) |
(14) |
- |
(1) |
(927) |
(508) |
|
Equity |
(3,395) |
3,037 |
59 |
(548) |
583 |
(656) |
94 |
(826) |
3,707 |
|
Commodity |
(16) |
(403) |
4 |
(15) |
9 |
(6) |
2 |
(425) |
(399) |
|
Total net derivative receivables |
(4,489) |
3,045 |
185 |
(745) |
304 |
(774) |
49 |
(2,425) |
3,147 |
|
Available for sale securities: |
|||||||||
|
Mortgage-backed securities |
1 |
- |
- |
- |
(1) |
- |
- |
- |
- |
|
Asset-backed securities |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Total available-for-sale securities |
1 |
- |
- |
- |
(1) |
- |
- |
- |
- |
|
Loans |
- |
(11) |
- |
- |
- |
294 |
- |
283 |
(10) |
|
Mortgage servicing rights |
4,699 |
(1,382) |
273 |
(75) |
(248) |
- |
- |
3,267 |
(1,382) |
|
Other Assets |
724 |
(82) |
2 |
(28) |
(200) |
- |
- |
416 |
(81) |
(In USD millions)
|
Particulars |
Fair Value on January 1, 2020 |
Total realized/ unrealized gains/ (losses |
Purchases |
Sales |
Issuances |
Settlements |
Transfers into Level 3 |
Transfers out of Level 3 |
Fair Value at March 31, 2020 |
Change in unrealized gains/(losses) related to financial instruments held at March 31 2020 |
|
Liabilities: |
||||||||||
|
Deposits |
3,360 |
(149) |
- |
- |
386 |
(172) |
4 |
(250) |
3,179 |
(135) |
|
Short-term borrowings |
1,674 |
(345) |
- |
- |
1,615 |
(929) |
40 |
(16) |
2,039 |
(409) |
|
Trading liabilities – debt and equity instruments |
41 |
3 |
(75) |
7 |
- |
- |
86 |
(1) |
61 |
6 |
|
Accounts payable and other liabilities |
45 |
(8) |
(23) |
1 |
- |
- |
- |
- |
15 |
(7) |
|
Beneficial interests issued by consolidated VIEs |
- |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Long-term debt |
23,339 |
(4,110) |
- |
- |
4,607 |
(3,549) |
370 |
(516) |
20,141 |
(3,984) |
Shifting of Assets to level 3 (2019)
(In USD millions)
|
Particulars |
Fair Value on January 1, 2019 |
Total realized/ unrealized gains/ (losses |
Purchases |
Sales |
Settlements |
Transfers into Level 3 |
Transfers out of Level 3 |
Fair Value at December 31, 2019 |
Change in unrealized gains/(losses) related to financial instruments held at December 31 2019 |
|
Assets |
|||||||||
|
Trading Assets: |
|||||||||
|
Debt Instruments: |
|||||||||
|
Mortgage-Backed Securities: |
|||||||||
|
U.S. GSEs and government agencies |
549 |
(62) |
773 |
(310) |
(134) |
1 |
(20) |
797 |
(58) |
|
Residential – nonagency |
64 |
25 |
83 |
(86) |
(20) |
15 |
(58) |
23 |
2 |
|
Commercial – nonagency |
11 |
2 |
20 |
(26) |
(14) |
15 |
(4) |
4 |
1 |
|
Total mortgage-backed securities |
624 |
(35) |
876 |
(422) |
(168) |
31 |
(82) |
824 |
(55) |
|
Obligations of U.S. states and municipalities |
689 |
13 |
85 |
(159) |
(8) |
- |
(610) |
10 |
13 |
|
Non-U.S. government debt securities |
155 |
1 |
290 |
(287) |
- |
14 |
(18) |
155 |
4 |
|
Corporate debt securities |
334 |
47 |
437 |
(247) |
(52) |
112 |
(73) |
558 |
40 |
|
Loans |
1,706 |
132 |
727 |
(708) |
(562) |
625 |
(538) |
1,382 |
51 |
|
Asset-backed securities |
127 |
- |
37 |
(93) |
(40) |
28 |
(22) |
37 |
(3) |
|
Total debt instruments |
3,635 |
158 |
2,452 |
(1,916) |
(830) |
810 |
(1,343) |
2,966 |
50 |
|
Equity Securities |
232 |
(41) |
58 |
(103) |
(22) |
181 |
(109) |
196 |
(18) |
|
Other |
301 |
(36) |
50 |
(26) |
(54) |
2 |
(5) |
232 |
91 |
|
Total trading assets – debt and equity instruments |
4,168 |
81 |
2,560 |
(2,045) |
(906) |
993 |
(1,457) |
3,394 |
123 |
|
Net Derivative Receivables: |
|||||||||
|
Interest |
(38) |
(394) |
109 |
(125) |
5 |
(7) |
118 |
(332) |
(599) |
|
Credit |
(107) |
(36) |
20 |
(9) |
8 |
29 |
(44) |
(139) |
(127) |
|
Foreign Exchange |
(297) |
(551) |
17 |
(67) |
312 |
(22) |
1 |
(607) |
(380) |
|
Equity |
(2,225) |
(310) |
397 |
(573) |
(503) |
(405) |
224 |
(3,395) |
(1,608) |
|
Commodity |
(1,129) |
497 |
36 |
(348) |
89 |
(6) |
845 |
(16) |
130 |
|
Total net derivative receivables |
(3,796) |
(794) |
579 |
(1,122) |
(89) |
(411) |
1,144 |
(4,489) |
(2,584) |
|
Available for sale securities: |
|||||||||
|
Mortgage-backed securities |
1 |
- |
- |
- |
- |
- |
- |
1 |
- |
|
Asset-backed securities |
- |
- |
- |
- |
- |
- |
- |
- |
- |
|
Total available-for-sale securities |
1 |
- |
- |
- |
- |
- |
- |
1 |
- |
|
Loans |
122 |
4 |
- |
- |
(125) |
- |
(1) |
- |
- |
|
Mortgage servicing rights |
6,130 |
(1,180) |
1,489 |
(789) |
(951) |
- |
- |
4,699 |
(1,180) |
|
Other Assets |
927 |
(198) |
194 |
(165) |
(33) |
6 |
(7) |
724 |
(180) |
(In USD millions)
|
Particulars |
Fair Value on January 1, 2019 |
Total realized/ unrealized gains/ (losses |
Purchases |
Sales |
Issuances |
Settlements |
Transfers into Level 3 |
Transfers out of Level 3 |
Fair Value at December 31, 2019 |
Change in unrealized gains/(losses) related to financial instruments held at Dec, 31 2019 |
|
Liabilities: |
||||||||||
|
Deposits |
4,169 |
278 |
- |
- |
916 |
(806) |
12 |
(1,209) |
3,360 |
307 |
|
Short-term borrowings |
1,523 |
229 |
- |
- |
3,441 |
(3,356) |
85 |
(248) |
1,674 |
155 |
|
Trading liabilities – debt and equity instruments |
50 |
2 |
(22) |
41 |
- |
1 |
16 |
(47) |
41 |
3 |
|
Accounts payable and other liabilities |
10 |
(2) |
(84) |
115 |
- |
- |
6 |
- |
45 |
29 |
|
Beneficial interests issued by consolidated VIEs |
1 |
(1) |
- |
- |
- |
- |
- |
- |
- |
- |
|
Long-term debt |
19,418 |
2,815 |
- |
- |
10,441 |
(8,538) |
651 |
(1,448) |
23,339 |
2,822 |
The Level 3 assets as a percentage of the total Bank assets, accounted for at fair value (including assets measured at fair value on non-recurring basis) were 2% at both 31st March, 2020, and 31st December, 2019, respectively. The Level 3 liabilities as a percentage of total Bank liabilities accounted for at fair value (including liabilities measured at a fair value on non-recurring basis) were 8% and 16%, as of 31st March, 2020, and 31st December, 2019, respectively.
Level 3 assets were $19.2 billion as of 31st March, 2020, reflecting an increase of $5.6 billion from 31st December, 2019, reflective of heightened market volatility and net transfers primarily due to $2.0 billion increase in trading loans, $3.1 billion increase in gross equity derivative receivables and $1.4 billion decreases in MSRs.
During 2019, $31 million of mortgaged backed securities were transferred to level 3 assets, therefore the fair value at December 31st 2019 stood at $824 million. Similarly, in the 1st quarter of 2020, a total of $1 million MBS were transferred to level 3 assets and the fair value stood at $546 million as of 31st March 2020.
