In an unprecedented move, JPMorgan Chase & Co. (JPM) announced a settlement with the Federal Housing Finance Agency (:FHFA) – conservator of Government Sponsored Enterprises (GSEs) Freddie Mac and Fannie Mae – pertaining to sale of home loans and mortgage backed securities (:MBS). JPMorgan did not admit to any malpractice but agreed to pay $5.1 billion in aggregate as settlement.
Of the total, JPMorgan will pay $4 billion (roughly $2.74 billion to Freddie and $1.26 billion to Fannie) to resolve claims related to $33.8 billion MBS sold to the GSEs between 2005 and 2007 by JPMorgan, Bear Stearns & Co., and Washington Mutual Inc. At the height of the financial crisis, the company had taken over Bear Stearns and Washington Mutual.
The remaining $1.1 billion will be paid to settle representation and warranty claims related to single-family mortgage purchases by Fannie and Freddie between 2000 and 2008. Here, Freddie is entitled to $480 million, while Fannie will receive $670 million.
In 2011, the FHFA sued JPMorgan and 17 other banks for the sale of risky MBS to Freddie and Fannie. The banks were accused of misrepresenting the facts related to quality of the underlying loans. Earlier this year, USB AG (USB), Citigroup Inc. (C) and General Electric Co. (GE) settled their cases with the FHFA.
Notably, the current settlement is part of a larger settlement deal, which JPMorgan is negotiating with the Department of Justice, the Department of Housing and Urban Development and the New York attorney general, for over a month now. The company is trying to resolve all legal issues related to the MBS sale
For JPMorgan, the settlement comes as a relief as it lowers its litigation ambiguity to an extent. In the past few months, the company settled various charges related to its ‘London Whale’ debacle and alleged manipulation of electricity prices in California and the Midwest region, among others.
Presently, JPMorgan faces investigations from at least seven federal agencies, various state regulators and a few foreign governments. In addition to mortgage-related investigations and cases, the company’s debt collection practices and recruitment of the offspring of Chinese bureaucrats are also being probed.
JPMorgan had set aside $9 billion as legal reserves in the third quarter. The company now has $23 billion for future settlements and litigations. Additionally, the company anticipates legal losses (over and above its existing litigation reserves) of about $5.7 billion as of Sep 30, 2013.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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