Lawyers representing investors that settled billions of dollars of mortgage bond claims with Bank of America last summer announced on Friday that they had opened investigations into $95 billion worth of mortgages held in JPMorgan Chase securities.
The investors are concerned that there were mortgages put inside those securities before the housing bubble burst that were subpar from the beginning, and they are investigating whether JPMorgan should repurchase those loans.
JPMorgan is among the banks with the most mortgage-related litigation and claims, having inherited much of its exposure from its acquisitions of Bear Stearns and Washington Mutual, which both ran into trouble partly because of troubled mortgages. Of the 243 mortgage bonds at JPMorgan that the investors are targeting, at least half were created by Bear Stearns or Washington Mutual.
For the banking sector in general, mortgage bond investigations have left a looming question mark over the industry’s prospects. Banks face investigations and potential litigation from private investors as well as state attorneys general and also from the Federal Housing Finance Agency, which oversees the mortgage financing giants Fannie Mae and Freddie Mac.
The potential dollar cost of the mortgage mess has kept growing this year; many analysts estimate it may be more than $100 billion for the industry. But as a team of bank analysts at FBR, a firm in Arlington, Va., put it in a report that estimated the liabilities: “Does anyone really know?”
For banks, the continuing doubts about their old mortgage businesses also makes it difficult to move on with new mortgage origination, because the companies may be concerned about the way they describe new mortgages in filings, analysts say. The lack of lending, in turn, is seen as a drag on the economy.
“It is inhibiting people from lending,” said Tom Cronin, a managing director of the Collingwood Group, a housing consulting firm in Washington. “You’re only going to make the very best loans, if you don’t know how enforcement is going to be handled.”
Joseph M. Evangelisti, a spokesman for JPMorgan, declined to discuss the bank’s mortgage liability exposure in depth, saying only: “We stand by our obligations under the agreements in question and we will honor our obligation to repurchase any loan that should be repurchased under the terms of those agreements.”
Banks like JPMorgan have benefited in recent years from the slowness of investors to investigate the bonds they bought before the financial crisis.
Under the terms of those bonds, investors who own small slivers of mortgage bonds — as most investors do — have been stymied from obtaining much data on the mortgages within the deals. The rules vary for each bond, but typically banks have to turn over detailed information only to investors who own more than a quarter of a bond. That has meant that large investors like Pimco, BlackRock and even the Federal Reserve Bank of New York have had to combine their interests to cross that threshold.
Many of the investors are coordinating their efforts through Gibbs Bruns, a law firm in Houston. That firm announced its plans to investigate the 243 JPMorgan deals on Friday.
It was also that firm that struck an $8.5 billion settlement with Bank of America to settle similar issues with $424 billion of mortgage bonds in July, though that settlement has yet to be approved by a court.
Gibbs Bruns did not return requests for comment.
It will most likely take months for the investors to determine how much money they think they are owed, but when they do, they may try to reach a settlement with JPMorgan or they may take the bank to court.
JPMorgan is currently in litigation with the Federal Deposit Insurance Corporation over the terms of its deal to acquire Washington Mutual, and it is unclear if it would be the F.D.I.C. or JPMorgan that would pay out on claims related to the failed bank’s mortgage bonds.
JPMorgan has set aside billions in reserves to cover mortgage-related litigation, according to a recent company presentation.
If the bank settled with the investors using the same loss ratio that was applied in the Bank of America settlement, it would cost JPMorgan about $1.9 billion. Still the bank would have other exposure outstanding. JPMorgan faces about $31 billion in class-action cases, according to McCarthy Lawyer Links, a legal consulting firm.
Elizabeth Nowicki, a professor of securities law at Tulane University and a former lawyer at the Securities and Exchange Commission, said that the efforts by investors might turn out to be the costliest and most important way that banks are held accountable for their mortgage security creations, because the push for accountability is coming from bank clients. For instance, in the one mortgage security case the S.E.C. has brought against JPMorgan, the bank settled the allegations in June for $153.6 million.
“I think this is going to have much more of an impact in terms of fear and Wall Street sort of shaking in its boots than anything the S.E.C. or Congress can do,” Ms. Nowicki said.
“Without a confident client base, the banks can’t make any money, and now that the client base is really trying to probe into these packages to see what really went on, they are going to have to give some answers.”
Article source: http://feeds.nytimes.com/click.phdo?i=31bbe6c3b9b534200c484374168a0f9a
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