JPMorgan Chase & Co. (JPM) may need to pay more than the $4.5 billion it offered to settle investor claims over faulty mortgages packaged into securities before the U.S. housing crash, a report prepared for bond trustees shows.
Trustees should reject the accord struck last November with a group of bondholders for 16 of the 330 deals included, and it’s a “close call” for three others, according to the report posted online this week by Daniel Fischel, president of Compass Lexecon, which is among firms hired by the securities administrators to help evaluate the offer.
“Based on the reports by the expert advisors, there exists a meaningful possibility that trustees may not accept the proposed settlement offer for all 330 trusts,” Nomura Holdings Inc. analysts including Paul Nikodem and Pratik K. Gupta wrote yesterday in a research note.
JPMorgan negotiated the proposed settlement with 21 institutional investors including BlackRock Inc. (BLK) and Pacific Investment Management Co. in a bid to move past legal troubles tied in part to the housing crisis. The accord was announced the week before the largest U.S. bank agreed to a record $13 billion settlement with government agencies over faulty mortgage securities.
Trustees including Deutsche Bank AG, Wells Fargo & Co. and Bank of New York Mellon Corp. must decide whether to accept JPMorgan’s proposal by Aug. 1. The deadline has been pushed back at least twice from an original date of March 16.
Brian Marchiony, a spokesman for New York-based JPMorgan, declined to comment, as did Jen Hibbard of Wells Fargo, Kevin Heine of Bank of New York and Renee Calabro of Deutsche Bank. Kathy Patrick, a lawyer at Gibbs & Bruns LLP representing the investors who negotiated the deal, didn’t immediately respond to an e-mail seeking comment.
Hedge fund Fir Tree Partners has said it will seek to continue separate lawsuits over some of the securities. Law firm Quinn Emanuel Urquhart & Sullivan LLP is also representing a group of investors objecting to the agreement for at least some deals, according to Fischel, also a professor of law and business emeritus at the University of Chicago Law School.
The accord sparked claims that JPMorgan and Bear Stearns Cos., which it bought in 2008, needed to repurchase mortgages whose quality was misrepresented, as well as pay for mishandling loans once they’re made. Another expert, Boston Portfolio Advisors Inc., said in its report the improper servicing boosted losses by $4 billion and disclosed that many of the loans are already managed by a separate “subservicer,” limiting the benefits to investors of transfers to such entities as called for by the deal, according to Nomura.
Bank of America Corp., the second-biggest U.S. bank, has faced opposition in court over an $8.5 billion settlement that it reached in 2011 with bondholders represented by Gibbs & Bruns and Bank of New York, as the trustee for more than 500 transactions. A New York state judge largely approved the deal in January, though the ruling is being appealed by investors seeking a bigger payout.
The Charlotte, North Carolina-based bank said this month it would pay $650 million to American International Group Inc., one of the objectors to the agreement that had also filed a separate suit over mortgage securities created by Countrywide Financial Corp., the lender bought by Bank of America in 2008.
While the proposed JPMorgan settlement is relatively small, compared with other mortgage-bond agreements, evidence from markets suggest that it wouldn’t be a “windfall” for the bank, Fischel wrote.
The amount offered represents 6.6 percent of past and potential losses on loans underlying the bonds, compared with 10.8 percent in the Bank of America deal, Barclays Plc analysts estimated in November. After a $55 million payment by Wells Fargo to an individual bond trust this year, investors recovered 32 percent of past and future losses, according to Nomura.
Fatan Sabry, an economist at National Economic Research Associates Inc., wrote in a report for trustees that JPMorgan’s planned payment exceeds potential losses from violations of so-called representation and warranties under several estimation methods.
Anthony J. Carpinello, a former New York State Supreme Court justice, said in a report that the statute of limitations for all the 330 deals has been extended, which could bolster any separate demands from investors reluctant to take part in the accord, according to Nomura. JPMorgan contends that the extension only applies to some of the deals, according to a website set up by trustees.
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