Morgan Stanley (MS) and JPMorgan Chase & Co. (JPM) agreed to pay $1.86 billion to end U.S. accusations of misconduct in their handling of home loans and related securities that left taxpayers shouldering losses after the financial crisis.
Morgan Stanley said yesterday it reached a $1.25 billion deal to end Federal Housing Finance Agency claims the bank sold faulty mortgage bonds to Fannie Mae (FNMA) and Freddie Mac (FMCC) before the firms’ losses pushed them into U.S. conservatorship. JPMorgan will pay $614 million after admitting it submitted ineligible loans for Federal Housing Administration and Veterans Affairs insurance.
JPMorgan “put profits ahead of responsibility by recklessly churning out thousands of defective mortgage loans, failing to inform the government of known problems with those loans and leaving the government to cover the losses,” Manhattan U.S. Attorney Preet Bharara said in a statement.
The six largest U.S. lenders have allocated more than $114 billion since the financial crisis to cover legal expenses, government probes and mortgage-related claims. Morgan Stanley’s deal with the FHFA prompted the New York-based bank to book an additional $150 million charge in the fourth quarter, reducing earnings for the period by 5 cents a share.
Morgan Stanley, which disclosed its settlement in a regulatory filing yesterday, was among 18 banks sued by the FHFA in 2011. Authorities sought to recoup some losses taxpayers covered when the government took control of the failing mortgage-finance companies in 2008. Seven banks, including JPMorgan and Deutsche Bank AG, agreed last year to pay a total of almost $8 billion to settle claims they also sold faulty mortgage bonds to Fannie Mae and Freddie Mac.
Morgan Stanley said last month it added $1.2 billion to legal reserves in the fourth quarter related to mortgage-backed securities litigation and investigations. The firm disclosed in a filing in November that the case involved the sale of $11 billion of mortgage-related securities.
Denise Dunckel, a spokeswoman for FHFA, confirmed the settlement in principle. The agreement requires final approvals by the parties, according to Morgan Stanley’s filing.
The FHFA wrote in its 2011 complaint that Morgan Stanley made untrue statements and material omissions in sales of mortgage bonds. The case had been set for trial in January 2015. The unpaid balance of the securities was $2.8 billion in September, and actual losses on the bonds were about $68 million, the bank said in November.
JPMorgan’s settlement announced yesterday focused on the firm’s participation in U.S. programs authorizing private-sector lenders to approve mortgages for insurance or refinancing by the government. Prosecutors claimed that starting in 2002, JPMorgan “routinely violated” rules while approving thousands of loans that failed to meet the programs’ requirements.
The government’s complaint contained examples of mortgages representing a “small fraction of the thousands of loans that Chase recklessly approved.”
For example, the bank underwrote a loan for a property in Jeffersonville, Indiana, and approved it for FHA insurance in violation of rules prohibiting reliance on documents more than 120 days old to verify the borrower’s assets, according to the complaint. The borrower defaulted after making only three payments. The Department of Housing and Urban Development paid JPMorgan, as holder of the note, a $109,253 insurance claim, according to the complaint.
JPMorgan acknowledged in its agreement that it failed to inform agencies when its own internal reviews discovered more than 500 defective loans that shouldn’t have been submitted for FHA and VA insurance, according to the Justice Department’s statement.
“This settlement recovers wrongfully claimed funds for vital government programs that give millions of Americans the opportunity to own a home,” Associate Attorney General Tony West said in the statement. U.S. District Court Judge J. Paul Oetken in Manhattan approved the accord.
“The settlement represents another significant step in the firm’s efforts to put historical mortgage-related issues behind it,” New York-based JPMorgan said in a statement. The deal can probably be covered by existing reserves, it said.
The bank separately agreed last year to pay $4 billion to settle FHFA claims related to about $33 billion in mortgage bonds.
Fannie Mae and Freddie Mac have taken $187.5 billion in U.S. aid and have returned $185.2 billion under terms of their federal conservatorship. The companies are required to turn over to the Treasury all quarterly profits above a $3 billion net worth-cap, and money is counted as a return on the almost 80 percent stakes the government holds, not as repayment of aid.
The cases are Federal Housing Finance Agency v. Morgan Stanley, 11-cv-06739, and United States of America ex rel. Keith Edwards v. JPMorgan Chase Bank, 13-cv-00220, U.S. District Court, Southern District of New York (Manhattan).
To contact the reporters on this story: Michael J. Moore in New York at firstname.lastname@example.org; Joel Rosenblatt in San Francisco at email@example.com; Patricia Hurtado in Federal Court in Manhattan at