JPMorgan to Pay $5.1 Billion to Settle Mortgage Claims

JPMorgan Chase & Co. (JPM) agreed to pay $5.1 billion to settle Federal Housing Finance Agency claims related to home loans and mortgage-backed securities the bank sold to Fannie Mae (FNMA) and Freddie Mac (FMCC), resolving part of a $13 billion accord the company has been negotiating.

The settlement includes $4 billion to resolve claims over mortgage bonds, and $1.1 billion to settle claims that JPMorgan sold faulty mortgages directly to Fannie Mae and Freddie Mac that the companies packaged into their own securities, the FHA said today in a statement.

'Today's settlements totaling $5.1 billion are an important step towards a broader resolution of the firm's MBS-related matters with governmental entities,' the bank said in a statement.

JPMorgan, the biggest U.S. bank by assets, is still in talks with other federal and state authorities to settle mortgage-related claims and probes, although those discussions hit a snag over the bank's bid for a reimbursement from the Federal Deposit Insurance Corp., a person familiar with the negotiations said today. U.S. prosecutors in California are also pursuing a potential criminal case against the bank.

The settlement of litigation '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,' FHFA 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.'

False Statements

The FHFA, the conservator of Fannie Mae and Freddie Mac, 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 mortgage finance companies from Sept. 7, 2005, through Sept. 19, 2007. The regulator said executives at JPMorgan, Washington Mutual and Bear Stearns Cos., which were acquired by JPMorgan in 2008, knowingly misrepresented the quality of the loans underlying the bonds, among other things, according to the lawsuit filed in federal court in Manhattan.

JPMorgan reported its first quarterly loss under Chief Executive Officer Jamie Dimon, 57, earlier this month after taking a $7.2 billion charge to cover the cost of mounting litigation and regulatory probes.

Other Investigations

The bank, which still faces investigations into its hiring practices in Asia, its energy-trading business, and its possible role in helping facilitate Bernard Madoff 's crimes, has already tapped $8 billion of $28 billion in reserves set aside since 2010 to cover its legal costs.

The FHFA 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, which are regulated by the FHFA, 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.

Other Settlements

UBS AG (UBSN), 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. (GE) both paid undisclosed amounts to settle the regulator's claims.

JPMorgan's effort to settle all of the mortgage-related claims snagged over the U.S. Justice Department's opposition to the bank's bid for a partial reimbursement, according to the person who asked not to be identified because the talks are private. The FHFA's share of the agreement would allow JPMorgan to seek FDIC reimbursement for losses stemming from the bank's acquisition of Washington Mutual 's assets from an FDIC receiver, according to the person.

The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-06188, U.S. District Court Southern District of New York (Manhattan).

To contact the reporters on this story: Clea Benson in Washington at cbenson20@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net

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