JPMorgan's Mortgage Confessions Don't Include O.J. Simpson
The JPMorgan mortgage settlement came out today, but it's been about to come out for so long now that I think I should get a pass from writing about it. The thing that everyone knew would happen, happened, in about the way everyone knew it would happen. Lotta money: $13 billion in all, of which $7 billion is civil securities settlements, $2 billion is "a civil penalty to settle the Justice Department claims under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)," and $4 billion is "in the form of relief to aid consumers harmed by the unlawful conduct of JPMorgan, Bear Stearns and Washington Mutual," although importantly not the unlawful conduct that is settled here, which is all about tricking buyers of those loans, not borrowers. Though I guess the working thesis is that tricking the buyers led to the financial crisis, which hurt consumers too, I don't know, sure, why not.
If I told you that the statement of facts, in which JPMorgan admits to all of its and Bear's and WaMu's sordid mortgage misdeeds, is boring, you'd be like, well, it's a list of mortgage misdeeds, of course it is boring. And I can't argue with you there. But it is not boring in the usual way that lists of mortgage misdeeds are boring. The usual way is:
- They are very long.
- They contain lots of boring descriptions of acronymic programs that banks used to cut corners in their rush to securitize mortgages without regard to quality.
- They quote e-mails from due diligence reviewers being all "nonononono these mortgages are terrible, we can never sell them, if we sold them that would be fraud, I need whiskey," and then note that of course the bank sold the mortgages anyway.
- Somewhere after page fifty a stripper gets a million-dollar mortgage by misrepresenting her income.
This statement of facts is 11 pages long, which is a sure sign that something weird is going on. And that's for three companies! WaMu's pre-acquisition conduct gets just under one page. One page! I mean here is the entire official substance of Washington Mutual's role in causing the financial crisis:
Prior to WaMu's failure and closure by the Office of Thrift Supervision ("OTS") in 2008, internal WaMu reviews indicated specific instances of weaknesses in WaMu's loan origination and underwriting practices, including, at times, non-compliance with underwriting standards; the reviews also revealed instances of borrower fraud and misrepresentations by others involved in the loan origination process with respect to the information provided for loan qualification purposes. WaMu did not disclose to securitization investors in written offering materials the information from its internal reviews concerning instances of borrower fraud and misrepresentations regarding borrower credit, compliance, and property valuation, in the origination of loans, including as to loans that were sold into securitizations. WaMu also did not disclose to investors information regarding instances of fraudulent and/or poor underwriting by certain non-WaMu loan originators who sold loans to WaMu, the fact that certain internal processes and controls were determined by internal reviews to have been ineffective in certain circumstances in preventing weak loan origination practices, or that the systems and data issues led to certain instances of delinquent loans being included in pools that were securitized in RMBS offerings. The last securitization by Washington Mutual was in 2007.
I count zero strippers. On the other hand I count five "instances," four "certains," an "at times," and an "and/or." This is a pretty bloodless summary is what I am saying. Your blood will not boil at this.
Here, on the other hand, is the Federal Housing Finance Agency's complaint in its lawsuit against JPMorgan over its, Bear's and WaMu's mortgage badness, which is settled by this settlement. Here is an actual paragraph (paragraph 246, emphasis added for reasons that will become apparent) from that complaint:
Various witnesses with direct experience in WaMu Bank's underwriting operations also testified before the FCIC that, during the relevant period, exceptions to WaMu's already loose underwriting guidelines were the rule. For example, in testimony before the PSI, Mr. Vanasek admitted that adherence to policy "was a continual problem at Washington Mutual where line managers particularly in the mortgage area not only authorized but encouraged policy exceptions." Similarly, Fay Chapman, WaMu's Chief Legal Officer from 1997 to 2007, relayed that, on one occasion, "[s]omeone in Florida made a second-mortgage loan to O.J. Simpson, and I just about blew my top, because there was this huge judgment against him from his wife's parents." When she asked how they could possibly close it, "they said there was a letter in the file from O.J. Simpson saying 'the judgment is no good, because I didn't do it."
Guys. GUYS. You start your press conference with that quote. Show the lousy underwriting, don't tell. "There were certain instances of weaknesses in WaMu's loan origination and underwriting practices, like giving O.J. Simpson a second mortgage because he told you he didn't do it."
The rest of the settlement's statement of facts is similarly dull and generic and stripped of all the color and obvious horribleness of the complaints themselves. The reasons for that are obvious. "For JPMorgan, any admissions had to strike a delicate balance," as DealBook puts it, "satisfying the government, but not stoking private lawsuits from investors."
The result leans pretty far in the direction of not stoking lawsuits. Everything is vague -- "in one instance," not "in Pool XYZ-123" -- so that no private investor can say "aha, see, my securitization is the one with this fraud." There are things that were not communicated to investors, but no admission that those things were material. There are "certain instances" of loans not complying with underwriting guidelines, but without any quantification it is hard to determine whether those certain instances invalidate JPMorgan's representations "that loans in the securitized pools were originated 'generally' in conformity with the loan originator's underwriting guidelines; and that exceptions were made based on 'compensating factors,' determined after 'careful consideration' on a 'case-by-case basis.'"
In other words, maybe everything was great. This statement of facts is not even close to adequate to conclude that JPMorgan, Bear or WaMu committed fraud in their mortgage securitizations. I mean, I guess, who cares, the settlement -- the $13 billion -- is enough to conclude that.
Three weeks ago, when the settlement started to be imminent, I wrote about my worry that it was likely to be a mush of anecdote, with no effort to quantify how bad JPMorgan/Bear/WaMu were relative to other banks, or how much their badness cost investors. That struck me as a missed opportunity: Given the attention this settlement is getting, and the fact that it is perhaps just the start of similar deals with other banks, it would be nice if it set a clear benchmark for what mortgage wrongdoing looks like and how it will be measured, evaluated, compared, and ultimately punished.
Nope! If anything I was too optimistic. This settlement is a mush, but it is an anecdote-free mush. Never mind failing to establish whether JPBearMu were worse than anyone else; this settlement doesn't even establish that they were bad. Just that they're paying a lot of money to make it go away.
1 There's another paragraph about how WaMu was seized by the OTS, placed in FDIC receivership, and sold to JPMorgan.
JPMorgan had a "tolerance" of 15 percent in the valuation review, meaning that JPMorgan would routinely accept loans for securitization, including those with loan-to-value ratios as high as 100 percent, when the valuation firm's "final recommendation of value" was up to 15 percent under the appraised value. In the same marketing communications described above, JPMorgan salespeople disclosed that its property valuation review involved an "Automated review of appraisals, with secondary reviews undertaken for any loans outside of tolerance." JPMorgan did not disclose that its "tolerance" was 15 percent.
The tone, and the fact that this makes up like half a page of an 11-page statement of facts, suggests that the Justice Department finds this important. But is it material for purposes of private lawsuits? None can say.
Which obviously raises some inferences. I mean. I'm not saying "everything they did was great and this is a shakedown." I'm just saying, it's a lame statement of facts.
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Matthew S Levine at firstname.lastname@example.org