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JPMorgan settles with regulator of Fannie, Freddie

The bank agrees to pay $5.1 billion. A broader deal is still being negotiated.

October 25, 2013|By Andrew Tangel and E. Scott Reckard
  • The suit against JPMorgan was one of 18 the FHFA filed in 2011 over mortgage bonds that Fannie and Freddie bought as supposedly safe investments during the housing boom. Above, the JPMorgan Chase & Co. headquarters in New York.
The suit against JPMorgan was one of 18 the FHFA filed in 2011 over mortgage… (Scott Eells, Bloomberg )

NEW YORK — The widely expected $13-billion settlement between JPMorgan Chase & Co. and the federal government started to take shape with details in a key deal unveiled Friday.

The New York bank agreed to pay $5.1 billion to the regulator overseeing mortgage giants Fannie Mae and Freddie Mac, even as JPMorgan kept hashing out the broader pact with federal and state agencies.

The Federal Housing Finance Agency had accused the bank and two others JPMorgan bought during the housing crisis of misleading Fannie and Freddie about mortgages and mortgage-backed securities it sold the companies from 2005 to 2007.

In settling, JPMorgan did not admit liability.

"This is a significant step as the government and JPMorgan Chase move to address outstanding mortgage-related issues," said Edward DeMarco, the FHFA's acting director.

He said the settlements would "have a beneficial impact for taxpayers and the housing finance market."

The settlement with the agency, which took control of Fannie and Freddie after the government seized them in 2008 to avert their failures, has two key parts.

Most of it — $4 billion — will cover losses on so-called private-label mortgage-backed securities that JPMorgan sold to Fannie and Freddie, which were buying supposedly high-quality bonds backed by subprime mortgages.

The FHFA contended that the offering documents for these securities were misleading, violating federal and state securities laws.

The remaining $1.1 billion will cover losses on mortgages sold to Fannie and Freddie. The FHFA contended these mortgages were riskier than advertised and thus violated representations and warranties made as part of the sales contracts.

Many of the resolved claims stem from troubles JPMorgan inherited from Bear Stearns and Washington Mutual Bank, two troubled financial institutions it gobbled up as the housing crisis worsened.

The suit against JPMorgan was one of 18 the FHFA filed in 2011 over mortgage bonds that Fannie and Freddie bought as supposedly safe investments during the housing boom.

Several banks said at the time that they would aggressively defend themselves. They contended that the losses stemmed from market forces, not their errors and omissions, and characterized Fannie and Freddie as sophisticated investors that knowingly took on risk.

So far, the FHFA said, it has settled four of the suits.

The settlements suggest the government has devised a formula to be used as a basis for demands on other banks — a "settlement calculus," as Columbia University law professor John Coffee called it.

"Future settlements will be negotiated with reference to this one," Coffee said.

In a statement, JPMorgan said the settlement would resolve its largest case involving mortgage-backed securities. The claims relate to about $33.8 billion in mortgage securities Fannie and Freddie bought from JPMorgan, Bear Stearns and Washington Mutual.

"Today's settlements totaling $5.1 billion are an important step towards a broader resolution of the firm's [mortgage securities] matters with governmental entities, and reflect significant efforts by the Department of Justice and other federal and state governmental agencies," JPMorgan said.

Friday's settlement does not include $4 billion earmarked in the broader settlement for homeowner relief, said a person familiar with the matter who was not authorized to speak publicly. The timing for an announcement of the broader pact was still unclear, this person said.

JPMorgan's tentative settlement with the Justice Department also requires it to pay about $4 billion in civil penalties and damages to other investors stemming from soured mortgage securities issued by the bank, according to people familiar with the negotiations.

The securities in question include bonds issued by JPMorgan — deals that federal prosecutors in Sacramento have investigated for civil and potential criminal violations.

A spokesman for New York Atty. Gen. Eric Schneiderman, who is part of the U.S. task force hammering out the broad settlement, praised the FHFA deal.

"Five years after the financial crisis, it is critical that we continue to share resources to maximize the relief provided to struggling homeowners and ensure accountability for those who created the crisis in the first place," said the spokesman, Damien LaVera.

Tangel reported from New York; Reckard from Los Angeles

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