Banking Law

What JPMorgan did wrong: 2006 meeting and ignored warnings spurred $13B settlement

A statement of facts negotiated as part of a record $13 billion settlement announced on Tuesday details how JPMorgan Chase misled investors when packaging mortgage securities.

JPMorgan hired a third party to review mortgages purchased from lenders for securitization, but ignored warnings and included faulty loans in the pools without telling investors, according to the statement of facts (PDF). The New York Times DealBook blog and the Wall Street Journal (sub. req.) have stories.

JPMorgan purchased the suspect mortgages between 2005 and 2007. In one instance, a third party reported it reviewed 23,000 loans and found that 27 percent did not meet underwriting guidelines and did not have sufficient compensating factors to justify credit. But JPMorgan accepted or reclassified as less risky half of those mortgages. In another instance, JPMorgan did not heed warnings from due diligence employees about the need to eliminate unreasonable stated-income loans from pools of loans it later purchased.

According to the Wall Street Journal, the settlement grew out of a 2006 meeting in which JPMorgan officials decided to keep selling faulty mortgage loans despite red flags. An employee who previously complained about loans approached a bank executive after the meeting to express her concerns, and was told the loans would be spread out among several offerings, lessening their impact. But the next offering did have a high percentage of the bad loans, the sources said.

The statement also detailed problems with securitized loans sold by Bear Stearns and Washington Mutual before their purchase by JPMorgan in 2008.

Prior coverage: “JPMorgan said to reach tentative deal to pay $13B to resolve civil probes, a record amount”

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