United States Attorney Benjamin B. Wagner
Eastern District of California
U.S. Attorney Announces Historic $13 Billion Settlement with JPMorgan for Sale of Defective Mortgage Securities
|FOR IMMEDIATE RELEASE||
Tuesday, November 19, 2013
SACRAMENTO, Calif. — The United States has entered into a civil settlement with JPMorgan Chase related to the sale by JPMorgan and two other banks acquired by JPMorgan in 2008, Bear Stearns and Washington Mutual, of defective residential mortgage-backed securities, U.S. Attorney General Eric Holder, Associate Attorney General Tony West, and United States Attorney Benjamin B. Wagner announced.
The settlement resolves potential multibillion-dollar claims for civil penalties under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) as well as claims for compensation of losses by the Federal Housing Finance Administration (FHFA), the National Credit Union Administration (NCUA), the Federal Deposit Insurance Corporation (FDIC), and the states of California, New York, Illinois, Massachusetts, and Delaware. It requires JPMorgan to pay $2 billion to the U.S. Department of Justice, plus a total of $7 billion to the states and federal agencies, and to provide an additional $4 billion worth of relief to homeowners and to neighborhoods impacted by the financial crisis that began in 2008.
At $2 billion, the settlement marks the largest civil penalty ever assessed against any bank for defective mortgaged-backed securities. This is the largest recovery ever in a case handled by the Eastern District of California's U.S. Attorney's Office.
The settlement resulted in part from an investigation by Assistant U.S. Attorneys and FHFA-OIG Special Agents in the Eastern District of California into potential FIRREA violations in the securitization and sale of residential mortgage-backed securities (RMBS) by JPMorgan itself (not Bear Stearns or Washington Mutual) between 2005 and 2007. Following the investigation, U.S. Attorney Wagner concluded that JPMorgan sold billions of dollars of non-prime RMBS backed by pools of mortgage loans that the bank knew contained loans that did not comply with the loan originators' underwriting guidelines, were secured by properties with inflated appraisals, were supported by inaccurate loan-to-value or debt-to-income ratios, or were originated in violation of federal and state laws and regulations, while misrepresenting to investors the quality of the loans in the pools and the risk of loss.
In the process of acquiring pools of mortgage loans from the loan originators, JPMorgan conducted "due diligence" by having outside underwriting firms review a sample of loan files – typically 20 to 30 percent of the loans in a pool. These outside firms examined whether the loans were made in accordance with the loan originator's underwriting standards and whether the loan documentation complied with applicable federal and state laws. Outside firms also conducted value reviews to ensure that the properties supplying collateral for the loans had been properly appraised.
RMBS investors could not fully assess the risk of loss from borrower defaults because they did not have direct access to the underlying loan data. JPMorgan knew this, and it promoted its supposedly robust due diligence process to potential RMBS investors.
As part of the settlement, JPMorgan admitted that the outside due diligence firms informed JPMorgan that numerous loans in the random samples of mortgage loans were in violation of underwriting guidelines and without compensating factors to justify the loans. Despite this information, JPMorgan waived many of the noncomplying loans into the securitization pools that it purchased and subsequently sold to investors. According to a test report by one of the outside due diligence firms, 27 percent of the sample loans reviewed by that firm in 2006 and early 2007 were graded as noncompliant or "reject" mortgage loans. JPMorgan subsequently waived half of those loans into the pools that were sold to investors. Even though due diligence on the random samples indicated that the securitization pools likely contained many more loans with underwriting violations, JPMorgan did not identify and eliminate those loans from the pools. Thus, as JPMorgan admits in the settlement agreement, it did not disclose to investors that the RMBS included mortgage loans that did not comply with the applicable underwriting guidelines. The bank also admits in the settlement agreement that it did not disclose that it had an established practice of allowing loans into the pools for which the value of the collateral property determined in the due-diligence process differed from the originator's appraisal by up to 15 percent, even when the loan-to-value ratio was as high as 100 percent.
JPMorgan also admitted that in one instance a JPMorgan employee, who was involved in acquiring loan pools, warned supervisors that the pools contained poor quality mortgage loans that should not be purchased or securitized. Despite the warning, JPMorgan purchased the pool and securitized many of the loans.
Other civil matters resolved as part of the settlement announced today include claims relating to the securitization and sale of mortgage-backed securities by Bear Stearns and Washington Mutual between 2005 and 2007. In addition to claims by the U.S. Department of Justice, the settlement resolves suits brought by FHFA, NCUA, and the New York Attorney General, and potential claims by the FDIC, the California Attorney General and state attorneys general in Illinois, Massachusetts, and Delaware. The FHFA portion of the settlement was announced previously. The settlement only releases civil monetary claims against JPMorgan and affiliated corporations. It does not release any potential criminal liability or any individuals from civil or criminal claims. JPMorgan has agreed to cooperate with the Department of Justice's ongoing investigations of this conduct.
"Abuses in the mortgage-backed securities industry fostered the deterioration of underwriting standards among many mortgage lenders, and fueled the financial crisis," said U.S. Attorney Wagner. "The impacts were staggering. JPMorgan sold more than $25 billion in non-prime RMBS certificates backed by toxic loans. Credit unions, commercial banks, and many other victim investors across the country, including some in the Eastern District of California, suffered billions of dollars in losses. This office, which serves a district that was ravaged by the financial crisis, played a major role in delivering a measure of justice in this matter. I want to particularly thank Rich Elias, Colleen Kennedy, and Kelli Taylor of this office for their outstanding work in this matter."
Michael P. Stephens, Acting Inspector General of FHFA stated: "JP Morgan and the banks it bought, Bear Stearns and Washington Mutual, sold hundreds of billions of dollars of defective mortgages into the securities markets, helping to precipitate the financial crisis. Investors, including Fannie Mae and Freddie Mac, suffered enormous losses by purchasing RMBS from JPMorgan, Washington Mutual and Bear Stearns not knowing about those defects. Today's settlement is a significant, but by no means final step by FHFA-OIG and its law enforcement partners to hold accountable those who committed acts of fraud and deceit. We are proud to have worked on this case with U.S. Attorney Benjamin Wagner and the attorneys from his office in the Eastern District of California and we look forward to our continued work together."
The Eastern District of California investigation was conducted by Assistant U.S. Attorneys Richard M. Elias and Colleen M. Kennedy, with Kelli L. Taylor, Chief of the Affirmative Civil Enforcement Unit, and under the supervision of David Shelledy, Chief of the Civil Division, with assistance from FHFA OIG special agents, and in conjunction with the Residential Mortgage-Backed Securities Working Group, a component of the Financial Fraud Enforcement Task Force.
The task force was established by President Obama in 2009 to wage an aggressive, coordinated and proactive effort to investigate and prosecute financial crimes. With more than 20 federal agencies, 94 U.S. attorneys' offices and state and local partners, it is the broadest coalition of law enforcement, investigatory and regulatory agencies ever assembled to combat fraud. For more information on the task force, please visit www.StopFraud.gov.