By Aruna Viswanatha and David Henry and Karen Freifeld
WASHINGTON/NEW YORK Nov 19 JPMorgan Chase & Co
said it routinely overstated the quality of mortgages it
was selling to investors, and it agreed to pay $13 billion to
settle related charges with the U.S. government, federal
officials said on Tuesday.
The behavior that the largest U.S. 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 U.S. government, which is under pressure to hold banks
accountable for behavior 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. JPMorgan's shares rose 0.7
percent to close at $56.15 on Tuesday.
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 $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. (See Breakingviews column )
"Without a doubt, the conduct uncovered in this
investigation helped sow the seeds of the mortgage meltdown,"
said U.S. Attorney General Eric Holder 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 percent of them did not
meet underwriting guidelines, but the bank still packaged at
least half of those into mortgage securities, the government
The government called the settlement the largest in U.S.
history, but the deal is really several rolled into one. It
includes a $4 billion relief package with U.S. Department of
Housing and Urban Development, and a $4 billion settlement with
the Federal Housing Finance Agency, which oversees government
mortgage financing companies Fannie Mae and Freddie
Of the $4 billion settlement with HUD, at least $1.5 billion
will go toward loans the bank is forgiving. As much as $500
million will go to change the terms of loans to lower monthly
The remaining $2 billion will be for assorted purposes,
including new loans for low- and moderate-income borrowers in
areas that have been hard-hit by the housing crisis and for
demolition of abandoned homes.
JPMorgan and government agencies led by the Justice
Department reached a tentative agreement in mid-October and have
been hammering out details since then. New York Attorney General
Eric Schneiderman was also involved in discussions.
JPMorgan's negotiations with the Justice Department began in
earnest last spring, after Justice Department lawyers in
California preliminarily concluded that the bank had violated
U.S. civil laws. The Justice Department had looked into mortgage
bonds the bank sold from 2005 through 2007, the company said in
The talks went sour, and government lawyers prepared to file
a lawsuit against JPMorgan in September and scheduled a news
conference to announce it. But they canceled it at the last
minute as JPMorgan reached out to government officials to
discuss a settlement. JPMorgan Chief Executive Jamie Dimon met
U.S. Attorney General Eric Holder later that month to talk about
a deal on mortgage probes.
Negotiations were difficult, people involved in the matter
said. Parties joined the talks, then dropped out. In recent
weeks, they stopped, only to restart. Details of the deal were
being worked out hours before it was announced on Tuesday, said
one person involved.
OBAMA'S TASK FORCE
The settlement is the most significant action to come out of
a task force the Obama administration created in January 2012,
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
administration's failure to hold Wall Street banks, executives,
and other parties accountable for the excesses that resulted in
the housing crisis.
The task force included representatives from the Justice
Department, the U.S. Securities and Exchange Commission, and the
New York State Attorney General, among others.
The agencies worked together unusually closely on the
lawsuits. The Justice Department sent more than a dozen
subpoenas after announcing the working group, then investigators
from the inspector general's office at the regulator of Fannie
Mae and Freddie Mac helped to build the cases. Meanwhile, U.S.
Attorneys offices around the country prepared the lawsuits and
opened investigations into possible criminal acts.
Robert Hinkley and David Seide from the inspector general's
office of the Federal Housing Finance Agency, who had prior
experience with capital markets and securities fraud cases,
helped guide Assistant U.S. Attorneys on where to look, and
agents from that office's investigations division conducted
The FHFA Inspector General's office has around 25 of its 150
staff working on these cases, and has contributed to fund dozens
of contract attorneys hired to scour the millions of documents
banks have provided since last year.
"We did know how securities were sold to investors, why what
investors were told wasn't true, and how we could prove that
securitizers knew it wasn't true when they made offers to
investors," Hinkley said in an interview.