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Mortgage Crisis Watch Business and legal issues affecting: loan repurchases | mortgage-backed securities | mortgage insurance

JPMorgan Chase Agrees to $13 Billion Settlement with the U.S. Justice Department for Knowingly Selling Toxic Mortgage-Backed Securities

On Tuesday, the United States Justice Department announced that it finalized a settlement agreement with JPMorgan Chase for $13 billion. This settlement will resolve a multitude of state and federal investigations into JPMorgan Chase’s sale of residential mortgage-backed securities to investors between 2005 and 2008. In addition to paying fines for securities violations, the proceeds from the settlement will be further distributed to compensate investors who relied upon representations made by JPMorgan Chase as to the value of the securities it sold on the secondary market. $4 billion of settlement funds is earmarked for consumer-related relief such as mortgage write-downs and payment reductions. In total, this settlement is the largest ever reached between any company and the government in U.S. history.

The Bank May Look to Loan Originators to Recover its Settlement Losses

Similar to recent settlements between other “too big to fail” banks and secondary-market investors–banks like Wells Fargo, Bank of America, and Citigroup–JPMorgan Chase’s payment of this enormous settlement sum may mean that the bank will look to its correspondent loan originators to try to defray its losses. Across the country, JPMorgan Chase continues to demand that correspondents buy back loans that were originated according to JPMorgan Chase guidelines and then purchased by the bank in great volume. The bank is also suing those loan originators who refuse to bend to its will and repurchase loans, notwithstanding the fact that those loans were originated and sold to JPMorgan Chase in complete compliance with its own underwriting and loan-sale requirements. The Bank’s alleged basis for these repurchase demands and lawsuits is that the entire risk of any borrower default under the loans was “shifted back” to the loan originators at the time that the loans were originally purchased, and that those originating lenders are therefore now responsible for any losses that JPMorgan Chase is now suffering as a result of its voracious loan purchasing, followed by the 2007 housing-market collapse. That is a difficult position to maintain.

More Claims Against JPMorgan Chase and Other Large Banks are Sure to Come

As JPMorgan Chase has already admitted that it has set aside $23 billion in reserve to cover for anticipated liability to the feds and its investors, and by this settlement has admitted that it made serious misrepresentations about mortgage-backed securities it sold on the secondary market, there are surely more claims to come. In a recent statement, Attorney General Eric Holder asserted that “without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown.” Others who were damaged by JPMorgan’s admitted, knowing securitization and sale of toxic loans will continue to come forward, seeking relief. Indeed, JPMorgan Chase already paid out $9.2 billion in advance of the DOJ settlement. In addition, this settlement may be a sign that more large U.S. banks will soon be joining JPMorgan Chase in making giant-sum payments to the DOJ, as Holder further stated that “The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over. No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.”