Personal Finance

Record $13 billion settlement by JPMorgan Chase could aid homeowners

Thousands of homeowners could get some mortgage relief under a record $13 billion deal reached Tuesday between the Justice Department and banking giant JPMorgan Chase, the largest such government settlement with a single entity.

Long in the making, the settlement resolves allegations about the bank’s liability for financially toxic packages of mortgage-backed securities sold to unsuspecting investors. It comprises $9 billion to settle federal claims and those from individual states, such as California, plus $4 billion in consumer relief.

It’s the most highly anticipated settlement to arise from the housing market crash and general economic calamity that came to a head in 2008.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder said. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”

In the settlement, JPMorgan Chase acknowledged a set of facts laid out by the Justice Department, stopping short of an outright admission of guilt. Those facts included a statement that JPMorgan Chase employees – not just those of lenders it had purchased – knowingly signed off on the sales of complex mortgage bonds that they knew didn’t meet compliance guidelines.

In a statement, company CEO Jamie Dimon said he was “pleased to have concluded this extensive agreement” and that it covered a “very significant portion” of lawsuits that involved JPMorgan Chase and two lenders it had purchased in 2008.

The investigation included help from U.S. attorneys in New York, California, Delaware, Illinois, Texas, Massachusetts and Pennsylvania.

It does not close the book on Wall Street misdeeds, Holder warned.

“The size and scope of this resolution should send a clear signal that the Justice Department’s financial fraud investigations are far from over,” he said. “No firm, no matter how profitable, is above the law, and the passage of time is no shield from accountability.”

For investors, homeowners and certain foreclosure-stricken communities, the settlement promises several kinds of aid. But it failed to fully satisfy consumer advocates, who said it came too late to help the 5.1 million American homeowners with foreclosures that have been completed since the housing crisis began, many of them in Florida and California. Those states saw 517,121 and 941,485 foreclosures, respectively, from January 2007 to the present, according to data that the researcher RealtyTrac compiled for McClatchy.

“We wish it had been earlier, when it really could have helped more people,” said Ed Mierzwinski, the consumer program director for the group U.S. PIRG. “The company is, to a large extent, trying to improve its social standing by essentially appearing to be a good citizen . . . but they delayed it so long. There is a huge cost of delay.”

California will recover $298.9 million in damages, to cover losses to the pension funds that serve state employees and teachers.

“JPMorgan Chase profited by giving California’s pension funds incomplete information ,” California Attorney General Kamala Harris said. “This settlement returns the money to California’s pension funds that JPMorgan wrongfully took from them.”

The last piece of the settlement to come together, and for many the most potentially significant, is the $4 billion in assorted relief for homeowners. Some whose mortgages are “underwater,” meaning they owe more than their homes are worth, might see some of their outstanding loans reduced. Others may secure lower monthly payments through forbearance, in which homeowners who are late on payments can restructure the mortgages to have lower monthly charges while still owing the same amounts.

Some consumer advocates questioned whether that forbearance actually helps struggling homeowners.

“Are they really, when they do $50,000 in forbearance, giving up the $50,000? The reality is they’re going to get it back at some point,” said Ira Rheingold, the executive director of the National Association of Consumer Advocates. “When they say $4 billion, is it really costing them (JPMorgan Chase) $4 billion or is it costing them $500 million? Who really knows?”

Homeowners can seek relief directly or via their lenders through existing loan-modification programs run by the Treasury Department and the Department of Housing and Urban Development.

Many of the bad loans were underwritten or purchased by two failed lenders that JPMorgan Chase had bought. Some came from Washington Mutual, a Pacific Coast thrift bought from government receivership in 2008. JPMorgan had argued before Tuesday that the Federal Deposit Insurance Corp. should have dealt with any claims against Washington Mutual.

Other bad loans inherited by JPMorgan Chase came on the watch of failed investment bank Bear Stearns. That troubled Wall Street player was purchased for cents on the dollar in March 2008, when the Bush administration pressed JPMorgan Chase to buy it in an effort to stabilize the financial system.

But the Justice Department statement noted that JPMorgan Chase employees were involved in misrepresentations to investors before Jan. 1, 2009.

JPMorgan Chase had set aside $23 billion for potential litigation regarding the two troubled lenders it purchased. The sum of Tuesday’s deal included a $4 billion settlement already reached with the Federal Housing Finance Agency, the regulator of mortgage finance.

CEO Dimon emerged from the financial crisis as Wall Street’s most revered executive, steering the bank through stormy waters. But his shine had lost its luster lately as the bank entered into numerous settlements exceeding $1 billion for alleged wrongdoing not only in mortgage finance but also financial markets more broadly. These included the infamous “London Whale” incident, in which a single overseas trader for the bank incurred losses above $6 billion, and alleged manipulation of West Coast energy prices.

Tuesday’s settlement instructs JPMorgan Chase to provide relief for demolishing abandoned and foreclosed homes and other actions in blighted neighborhoods. Eligibility would be tied to regions associated with high foreclosure levels, such as those found during the depths of the housing crisis in areas that include North Carolina, Florida and California’s San Joaquin Valley.

The $4 billion also includes money to be used for originating new mortgages for borrowers with low and moderate incomes. The bank must spend the $4 billion by the end of 2016 and must hire an independent monitor to oversee the settlement operations.

Other notable housing-crisis developments include:

– November: The U.S. Attorney for the Southern District of New York brought action seeking an $860 million-plus settlement with Bank of America over bad loans underwritten by disgraced California-based lender Countrywide Financial.

– January: Government regulators settled with 10 major banks – including Bank of America, JPMorgan Chase, Citibank and Wells Fargo – for at least $8.5 billion over misdeeds by mortgage servicers, who collect mortgage payments on behalf of investors.

– January: Bank of America settled with mortgage finance giant Fannie Mae, paying $3.6 billion and buying back more than 30,000 bad loans that Countrywide originated from 2000 to 2008.

– February 2012: State and federal regulators settled for more than $25 billion with five major banks over foreclosure abuses.

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