JPMorgan Chase & Co. overrode an independent analysis of home loan portfolios by buying and selling defective loans to create a sanitized version of the pool, which was then securitized and sold, a court was told.
FSA Asset Management LLC, which bought the residential mortgage-backed securities that later collapsed in value, and its parent Franco-Belgian bank Dexia SA filed hundreds of e-mails and transcripts of employee interviews in federal court in Manhattan on Feb. 4, urging a judge not to throw out their lawsuit over the collateralized securities.
JPMorgan received reports from independent mortgage loan underwriters showing that 20 percent to 80 percent of the loans in samples used for testing didn’t meet the underwriting guidelines, including fraudulent home appraisals or missing documentation, FSA Asset Management, or FSAM, said in the filing.
“Rather than disclose these known defects to FSAM, defendants bought and sold massive quantities of defective loans,” FSAM said. “Defendants secretly overrode the independent loan underwriters’ determinations, creating a final, sanitized version.”
FSAM failed to expressly assign fraud claims related to the securities to Dexia, so the bank isn’t allowed to sue under New York law, JPMorgan said in a Jan. 21 filing, urging the judge to throw out the lawsuit without a trial.
FSAM also can’t sue because it had recovered the full purchase price of the securities it bought so it suffered no harm, JPMorgan said.
The plaintiffs purchased more than $1.6 billion of residential mortgage-backed securities in 51 offerings between 2005 and 2007, according to an amended statement of claim filed in New York State court in May. The purchases were made from JPMorgan and two banks the New York-based lender acquired during the 2007 credit crisis, Bear Stearns and Washington Mutual.
“Defendants rehash the well-worn ‘don’t blame us, blame the financial crisis’ defense, which numerous courts have rejected,” Dexia said.
The case is Dexia SA v. Bear Stearns & Co. 12-cv-04761. U.S. District Court Southern District of New York (Manhattan).