The mortgage fraud crisis continues to exact a toll on Wall Street, as JPMorgan Chase agreed to pay a record $13 billion to the government and consumers over mislabeled mortgage securities that contributed to the financial crisis.
In the announcement made by the U.S. Justice Department, the details of the deal stipulate that the banker pay $9 billion to authorities and $4 billion in relief to homeowners who were harmed by JPMorgan and the two failed banks it took over during the crisis, Bear Stearns and Washington Mutual.
The bank “acknowledged it made serious misrepresentations to the public – including the investing public” over the quality of residential mortgage-backed securities (RMBS) it sold ahead of the financial crisis, the Justice Department said in a statement.
In the implosion of the housing market between 2006 and 2008, as millions of homeowners defaulted on high-risk mortgages, investors lost billions of dollars from securities created from bundles of mortgages. Those securities were sold by JPMorgan and other big Wall Street banks.
“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said. “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.”
Goldman Sachs, Citigroup and other big banks together have paid hundreds of millions in penalties to settle civil charges brought by the SEC, but the $13 billion is a record thus far. The settlement came about after months of difficult talks between regulators, justice authorities and the bank. According to sources, at one point at the end of September, the Justice Department was reportedly hours away from suing the bank when JPMorgan Chairman and CEO Jamie Dimon met in Washington with Holder to keep the deal discussions going.
“We are pleased to have concluded this extensive agreement with the President’s RMBS Working Group and to have resolved the civil claims of the Department of Justice and others,” Dimon said in a statement.
While the record agreement clears most of the civil allegations over mortgage securities against the banks, the Justice Department said the deal does not absolve the bank or its employees from possible criminal charges.
“Through this $13 billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans,” Associate Attorney General Tony West said in a statement.
New York Attorney General Eric Schneiderman, who co-led a task force investigating JPMorgan and other banks over losses the federal government and states incurred on mortgage securities, said the settlement was an “historic deal which will bring long-overdue relief to homeowners around the country and across New York.”
“We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten,” he said. “And as a result, we’ve won a major victory today in the fight to hold those who caused the financial crisis accountable.”
According to the deal, in paying $4 billion to consumers, JPMorgan is required to forgive some of the principal on many customers’ loans and modify others to improve conditions for borrowers. If this doesn’t happen, the bank will have to pay damages to the nonprofit group NeighborWorks America, which supports affordable housing.