JPMorgan Chase agrees on Settlement with U.S. over Bad Mortgages

by Michael P. Lewis on October 19, 2013

JPMorgan Chase has reached a tentative agreement with the Justice Department to pay a $13 billion dollar settlement to resolve the claims that it knowingly sold faulty mortgage securities.

18 financial firms, including JPMorgan, were sued by the FHFA for taking part the issuing of loans to homebuyers, pooling hundreds of mortgages and marketing the bundles as investments that could be traded with stocks.  However, when the housing market crashed, the securities were worthless and left investors, such as Fannie Mae and Freddie Mac, with massive losses.  Even if the settlement were finalized, JPMorgan and its executives would still possibly face criminal prosecution for knowing that the bank was selling bad mortgages.

The tentative distribution of the settlement would comprise of $4 billion in relief to homeowners, including lowering how much they owe on their mortgages.  In addition, $4 billion would go to the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, to resolve allegations that JPMorgan made false statements and omitted facts about the quality of home loans it sold.

If the agreement were settled, it would be the largest penalty ever paid by a single company.   According to Thomas Gorman, a securities lawyer at Dorsey & Whitney, “Resolving the mortgage case for $13 billion is a major win for the DOJ, particularly since the deal only applies to a civil case”.  Gorman also stated that this deal “brings to account a major Wall Street player for the market crisis.”

On October 11, 2013, JPMorgan reported its first loss in nearly 10 years.  The bank suffered a new loss of $380 million after setting aside an additional $9.2 billion for future litigation expenses.

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