JPMorgan Chase & Co. (JPM) agreed to drop litigation against the Federal Deposit Insurance Corp. over some mortgage bonds sold by Washington Mutual Inc., clearing the way for a $9 billion accord with state and federal officials, two people briefed on the matter said.
The settlement will be announced tomorrow, said one of the people, requesting anonymity because the negotiations aren’t public. JPMorgan, the largest U.S. lender by assets, agreed today to the terms of $4 billion in consumer relief payments, the person said. The remaining $5 billion will go toward penalties and resolving claims.
The bank battled with the FDIC over who should pay some liabilities from WaMu, the failed Seattle thrift that the agency placed into receivership in 2008 while selling assets to New York-based JPMorgan.
The agreement, which is being brokered by the Justice Department, won’t interfere with JPMorgan’s ability to sue the FDIC to cover part of a $4 billion settlement last month with the Federal Housing Finance Agency, two people familiar with the matter said.
It also won’t prohibit the bank from seeking reimbursement from the FDIC for claims against WaMu from private investors, they said. JPMorgan announced a tentative $4.5 billion deal last week with 21 institutional investors, including Pacific Investment Management Co., to settle claims that the lender and its subsidiaries sold faulty mortgage bonds.
The $9 billion settlement, which includes a $2 billion fine, will end civil investigations by the Justice Department and the California and New York state attorneys general, as well as lawsuits by the FDIC and National Credit Union Administration, people briefed on the talks said.
Andrew Gray, a spokesman for the FDIC, JPMorgan’s Brian Marchiony and Brian Fallon at the Justice Department said they couldn’t comment because the negotiations are confidential.
The consumer-relief portion of the accord, negotiated over the weekend by Associate Attorney General Tony West and U.S. Housing and Urban Development Secretary Shaun Donovan, requires JPMorgan to hire an independent monitor and provide the entire $4 billion by the end of 2016, one of the people said.
JPMorgan’s costs include at least $1.5 billion in principal writedowns for struggling homeowners with federally backed loans, the person said. Of that, $1.2 billion would be for first lien principal writedowns. At least $300 million must go toward forbearance, in which banks shift loan terms to account for a change in a debtor’s income, the person said.
An additional $2 billion would fund interest-rate reductions of existing loans, new loans or loan originations that JPMorgan would be required to keep in its portfolio, the person said. The bank also would receive credit for so-called anti-blight efforts, such as the costs of demolishing vacant homes and absorbing the mortgages of such properties the bank has yet to foreclose on, the person said.
If JPMorgan doesn’t provide the entire $4 billion by the end of 2016 then the bank would be required to pay any leftover portion to the government or a nonprofit, the person said.