JPMorgan admits overstating mortgage quality
Biggest US bank admits routinely overstating quality of mortgages it sold investors; many of the loans went bad
JPMorgan Chase said it routinely overstated the quality of mortgages it was selling to investors, and it agreed to pay US$13 billion to settle related charges with the US government, federal officials said on Tuesday.
The behaviour that the largest US bank admitted to, authorities said, is at the heart of what inflated the housing bubble: lenders making bad mortgages and selling them to investors who thought they were safe.
When the loans started turning bad, investors lost faith in the banking system, and a housing crisis turned into a financial crisis.
The civil settlement marks the end of weeks of tense negotiations between JPMorgan Chase, which is looking to move past the legal issues that have plagued it for more than a year, and the US government, which is under pressure to hold banks accountable for behaviour that led to the financial crisis.
JPMorgan said it has set aside all the funds it needs to cover the settlement, meaning the deal will have no impact on its earnings. The deal resolves most of its mortgage issues with federal authorities, the bank said. But even after the settlement, the bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate.
It may still also face criminal charges linked to mortgage matters. The bank said last month it had set aside US$23 billion to cover litigation expenses.
At issue in Tuesday’s settlement was the long chain of parties between the original mortgage lender and the ultimate investor in the loan.
Often smaller lenders would make a mortgage loan and sell it to a bank, which would package loans into bonds and, in turn, sell them to investors. This chain allowed capital to flow to loans that arguably should never have been made.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” US Attorney General Eric Holder said in a statement.
The investors that bought these mortgage bonds demanded that the loans be of a particular quality. JPMorgan said the loans met the guidelines, but one of its employees said they did not, the bank admitted.
Due-diligence firms that reviewed some of those loans for JPMorgan in 2006 and 2007 said that 27 per cent of them did not meet underwriting guidelines, but the bank still packaged at least half of those into mortgage securities, the government said.
The government called the settlement the largest in US history, but the deal is really several rolled into one. It includes a US$4 billion relief package with the US Department of Housing and Urban Development, and a US$4 billion settlement with the Federal Housing Finance Agency, which oversees government mortgage financing companies Fannie Mae and Freddie Mac.
Of the US$4 billion settlement with HUD, at least US$1.5 billion will go towards loans the bank is forgiving. As much as US$500 million will go to change the terms of loans to lower monthly payments.
The remaining US$2 billion will be for assorted purposes, including new loans for low- and moderate-income borrowers in areas that have been hit hard by the housing crisis and for demolition of abandoned homes.
The settlement is the most significant action to come out of a task force US President Barack Obama’s administration created in January last year, years after the height of the financial crisis, to probe the packaging and sale of shoddy home loans.
Lawmakers and others have been critical of the government’s failure to hold Wall Street banks, executives, and other parties accountable for the excesses that resulted in the housing crisis.