04.24.12 www.bloombergbriefs.com Bloomberg Brief | Risk 3
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JPMorgan Cuts Mortgage hedging, Benefits as Rates Rise
JPMorgan Chase & Co. reported a risk management gain in its mortgage servicing
On The MOve
portfolio of $191 million that analysts ascribe to improvements it has made on interest- CVC Hires Stephen Hickey
rate hedging. The bank says it cut value-at-risk for its mortgage hedges, indicating that
from Goldman Sachs
the gain may have been achieved by a reduction in interest-rate swap positions before
CVC Capital Partners Ltd. hired
Stephen Hickey from Goldman
The gain, which compares to losses of $372 million in the fourth quarter and $1.24
Sachs Group Inc. to be chief risk
billion a year ago, is the result of “better MSR risk management,” according to an April
officer at its credit investment division,
16 report by Wells Fargo Securities analyst James Strecker.
CVC Credit Partners.
The mortgage servicing rights portfolio is one of the main areas of risk the com-
Hickey is a former partner and global
pany hedges, JPMorgan Chief Financial Officer Doug Braunstein said on an April 13
head of leveraged finance at Goldman
Sachs, the London-based private eq-
Banks hedge against reductions in interest rates that increase the likelihood that
uity firm said in an e-mailed statement.
home loan borrowers will refinance mortgages early. These hedges help maintain the
He will be based in New York.
value of MSR portfolios for banks, which collect fees for administering the loans over — Anne-Sylvaine Chassany
time. When rates rise, the hedges can result in mark-to-market losses for the banks,
unless positions are reduced.
As swap rates increased in the first quarter, the value of JPMorgan’s mortgage servic- FIS Names Ex-BofA Risk
ing portfolio rose by $644 million, offsetting the $406 million loss the bank reported on Executive as Risk Chief
interest-rate derivatives used to hedge against declines in swap rates, according to a Greg Montana has been named
first-quarter financial supplement. JPMorgan’s mortgage trading value-at-risk declined chief risk officer at Jacksonville,
by 75 percent in the last quarter, according to filings. Since VaR is calculated using Florida-based FIS, according to a
market volatility and position size as inputs, that suggests the bank reduced the hedg- company statement.
ing positions on its MSR portfolio. Montana will lead the strategic de-
The trading VaR of JPMorgan’s mortgage production and servicing fell to $11 million in velopment and execution of the com-
the first quarter from $44 million in the last quarter of 2011. The VaR of its entire Treasury pany’s enterprise-wide risk program.
operation remained at $67 million in the first quarter. VaR is a measure of maximum loss He will report to FIS Chairman and
to a 95 percent confidence level. Patrick Linehan, a spokesman for JPMorgan, declined Chief Executive Officer Frank Martire,
to comment further on MSR hedging because it is proprietary information. the company said in the statement.
The largest banks last year reported losses on MSR portfolios after revising models to Prior to joining FIS, Montana was
account for higher-than-expected foreclosures and servicing costs related to regulatory a senior vice president and senior
action and lawsuits last year. JPMorgan, which manages an $884.2 billion MSR portfolio, operational risk executive for Bank
revised down the value of its MSR in the fourth quarter. The value of MSR now makes up of America.
0.9 percent of the total portfolio of mortgages, from 0.8 percent in the fourth quarter. — Melissa Karsh
Wells Fargo & Co., the largest MSR manager with $1.8 trillion in loans, reported a
$250 million reduction in its MSR income, booking a net loss of $58 million in the first
quarter compared with a $201 million gain in the fourth quarter of last year. The loss CIBC Appoints CRO with
was “related to MSR valuation changes and less effective hedging,” according to an Banking Background
April 16 report by James Mitchell, an analyst at Buckingham Research Group. Geoff Scott has been appointed
Wells Fargo reported the loss in the first quarter after revising its risk models based chief risk officer at CIBC FirstCarib-
on interest-rate expectations. The company booked a $343 million charge following the bean, replacing Hugh Boyle, who
change in the rate used to value its mortgages, according to a first-quarter statement. recently left the bank, according to a
“Since prepayment speed is the most significant valuation assumption, we have statement from CIBC.
invested heavily in developing proprietary loan level prepayment models,” Mike Scott is currently a vice president
Heid, then co-president of Wells Fargo’s home mortgage business, said in a May for commercial banking for the
2010 presentation. greater Toronto area at the bank
The bank models the behavior pattern of 22 million loans over 10 years to arrive at its and has a background in corporate
assumptions, Heid said in the presentation. credit and risk management, the
Wells Fargo declined to comment further. statement said.
— Radi Khasawneh — Melissa Karsh
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