Thousands of homeowners could gain some measure of mortgage relief under a record $13 billion deal reached Tuesday between the Justice Department and banking giant JPMorgan Chase, in what is the largest such government settlement with a single entity.
Long in the making, the settlement resolves allegations about the bank’s liability for financially toxic packages of mortgage-backed securities sold to unsuspecting investors. It includes $9 billion to settle federal claims and those from individual states like California, and $4 billion in consumer relief.
It is also, far and away, the most highly anticipated settlement to arise from the housing market crash and general economic calamity that came to a head in 2008.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” said Attorney General Eric Holder. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior. “
In the settlement, JPMorgan Chase acknowledged a set of facts laid out by the Justice Department, stopping short of an outright admission of guilt. The facts included a statement that JPMorgan Chase employees, not just those of lenders it had purchased, knowingly signed off on the sale of complex mortgage bonds that they knew did not meet compliance guidelines.
In a website statement, company CEO Jamie Dimon said he was “pleased to have concluded this extensive agreement” and said it covers a “very significant portion” of lawsuits involving it and two lenders it purchased in 2008.
The investigation included help from U.S. attorneys in New York, California, Delaware, Illinois, Texas, Massachusetts and Pennsylvania and does not does not close the book on Wall Street misdeeds, Holder warned.
"The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over,” he said. “No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability."
For investors, homeowners and certain foreclosure-stricken communities, the settlement promises several kinds of aid. But it failed to fully satisfy consumer advocates, who say it comes too late to help the 5.1 million American homeowners with completed foreclosures since the housing crisis began, many of them in Florida and California. Those states respectively saw 517,121 and 941,485 foreclosures from January 2007 to present, according to data compiled for McClatchy by researcher RealtyTrac.
“We wish it had been earlier when it really could have helped more people,” said Ed Mierzwinski, consumer programs director for the group U.S. PIRG. “The company is, to a large extent, trying to improve its social standing by essentially appearing to be a good citizen but they delayed it so long. There is a huge cost of delay.”
California will recover $298.9 million in damages, to cover losses to the pension funds serving state employees and teacher.
“JPMorgan Chase profited by giving California’s pension funds incomplete information ,” California Attorney General Kamala Harris said. “This settlement returns the money to California’s pension funds that JPMorgan wrongfully took from them.”
The last piece of the settlement to come together, and for many the most potentially significant, is the $4 billion in assorted relief for homeowners. Some whose mortgages are “under water,” meaning they owe more than the home is worth, could see some of their outstanding loan reduced. Others may secure lower monthly loan payments through forbearance, where homeowners late on payments can restructure the mortgage to have a lower monthly charge while still owing the same amount.
Some consumer advocates question whether that forbearance actually helps struggling homeowners.
“Are they really, when they do $50,0000 in forbearance, giving up the $50,000? The reality is they’re going to get it back at some point,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “When they say $4 billion, is it really costing them (JPMorgan Chase) $4 billion, or is it costing them $500 million? Who really knows?”
Many of the bad loans were underwritten or purchased by two failed lenders JPMorgan Chase had bought. Part came from Washington Mutual, a Pacific Coast thrift bought from government receivership in 2008. JPMorgan had argued prior to Tuesday that the Federal Deposit Insurance Corp. should have dealt with any claims against Washington Mutual.
Other bad loans inherited by JPMorgan Chase came on the watch of failed investment bank Bear Stearns. That troubled Wall Street player was purchased for cents on the dollar in March 2008 when the Bush administration pressed JPMorgan Chase to buy it in an effort to stabilize the financial system that months later bordered on complete collapse.
But the Justice Department statement noted that JPMorgan Chase employees were also involved in misrepresentations to investors prior to Jan. 1, 2009.
JPMorgan Chase had set aside $23 billion for potential ligitation regarding the two troubled lenders it had purchased. The sum of Tuesday’s deal included a $4 billion settlement already reached with the Federal Housing Finance Agency, the regulator of mortgage finance.
CEO Dimon emerged from the financial crisis as Wall Street’s most revered executive, steering the bank through stormy waters. But his shine lost its luster lately as the bank has entered into numerous settlements exceeding $1 billion for alleged wrongdoing not only in mortgage finance but financial markets more broadly. These include the infamous “London Whale” incident where a single overseas trader for the bank incurred losses above $6 billion, and alleged manipulation of West Coast energy prices.
The settlement instructs JPMorgan Chase to provide relief for demolishing abandoned and foreclosed homes and other actions in blighted neighborhoods. Eligibility would be tied to regions associated with high foreclosure levels, such as those found during the depths of the housing crisis in areas including North Carolina, Florida and California’s San Joaquin Valley.
The $4 billion also includes money to be used for originating new mortgages for borrowers with low and moderate incomes. The bank will have to spend the $4 billion by the end of 2016 and hire an independent monitor to oversee the settlement operations.