JPMorgan Chase & Co. agreed to pay $5.1 billion to settle Federal Housing Finance Agency claims related to home loans and mortgage-backed securities the company sold to Fannie Mae and Freddie Mac, resolving part of a $13 billion accord the firm is negotiating with the government.
The deal includes $4 billion to end the FHFA’s 2011 lawsuit accusing JPMorgan of selling Fannie Mae and Freddie Mac faulty mortgage bonds, the agency said yesterday. The remaining $1.1 billion settles claims that the firm sold the companies defective loans that they packaged into their own securities.
JPMorgan Chief Executive Officer Jamie Dimon, 57, is seeking to settle state and federal probes into whether the company misrepresented the quality of mortgage bonds packaged and sold at the height of the U.S. housing boom. JPMorgan, the biggest U.S. bank, didn’t admit wrongdoing in the FHFA deal.
The pact is “an important step towards a broader resolution of the firm’s MBS-related matters with governmental entities,” the New York-based bank said in a statement.
The firm has been negotiating with the U.S. Justice Department to resolve probes by its staff, as well as claims from other authorities including New York Attorney General Eric Schneiderman and California Attorney General Kamala Harris, people briefed on the matter said this week.
The FHFA settlement “provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae’s and Freddie Mac’s assets on behalf of taxpayers,” the agency’s acting director, Edward J. DeMarco, said in a statement. “I am pleased that a resolution of single-family, whole-loan representation and warranty claims could be achieved at the same time.”
JPMorgan preserved its right to seek reimbursement from the Federal Deposit Insurance Corp. for FHFA claims stemming from Washington Mutual Bank’s estate, which is managed by the FDIC. JPMorgan has been in a legal battle with the FDIC over who should pay certain liabilities from the failed thrift, which the agency placed into receivership in 2008 while selling assets to JPMorgan.
While the agreement prohibits JPMorgan from seeking money directly from the FDIC, it doesn’t preclude the bank from seeking reimbursement from Washington Mutual’s receivership for some of the settlement costs. The Justice Department is opposing JPMorgan’s effort to shed the Washington Mutual liabilities, according to a person familiar with the talks.
The FHFA, the conservator of Fannie Mae and Freddie Mac, sued JPMorgan and 17 other banks over faulty mortgage bonds two years ago in an effort to recoup some of the losses taxpayers were forced to cover when the government took control of the failing mortgage finance companies in 2008.
Fannie Mae and Freddie Mac have taken $187.5 billion in federal aid since then. They’ve paid about $146 billion in dividends on the U.S. stake, which doesn’t count as a repayment of the taxpayer aid.
The FHFA had accused JPMorgan and its affiliates of making false statements and omitting material facts in selling about $33 billion in mortgage bonds to the two companies from Sept. 7, 2005, through Sept. 19, 2007.
Executives at JPMorgan, Washington Mutual and Bear Stearns Cos., which was also acquired by JPMorgan in 2008, knowingly misrepresented the quality of the loans underlying the bonds, the regulator wrote in the lawsuit in federal court in Manhattan.
JPMorgan reported its first quarterly loss under Dimon earlier this month after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes.
The bank, which still faces investigations into its hiring practices in Asia, energy-trading business, and financial services provided to Ponzi scheme operator Bernard Madoff, has already tapped $8 billion of $28 billion in reserves set aside since 2010 to cover its legal costs.
UBS AG, Switzerland’s largest bank, agreed in July to pay $885 million to settle claims it misrepresented the quality of the loans backing $4.5 billion in residential mortgage bonds it sponsored and $1.8 billion of third-party mortgage bonds sold to Fannie Mae and Freddie Mac. UBS was the third bank to reach an agreement with FHFA.
Citigroup Inc. and General Electric Co. both paid undisclosed amounts to settle the regulator’s complaints.
The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-06188, U.S. District Court, Southern District of New York (Manhattan).