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JPMorgan's Legal Woes Persist

Zacks Equity Research

JPMorgan Chase & Co. (JPM) continues to be embroiled in legal hassles related to the sale of risky mortgage backed securities (:MBS). Now, the U.S. housing regulator – the Federal Housing Finance Agency (:FHFA) – is seeking a minimum of $6 billion as fine to settle lawsuits over MBS.

In 2011, the FHFA, which oversees Fannie Mae and Freddie Mac, sued JPMorgan over the sale of $33 billion worth MBS to Fannie Mae and Freddie Mac by making false and misleading statements related to the quality of loans. Apart from JPMorgan, 16 other major banks including Bank of America Corporation (BAC), Citigroup Inc. (C) and UBS AG (UBS) were sued on similar charges.

The regulator charged Washington Mutual and Bear Stearns Cos. – both acquired by JPMorgan in 2008 – of misrepresenting facts about the quality of loans underlying MBS. These securities were sold to Fannie Mae and Freddie Mac during 2005–2007.

While JPMorgan is in negotiation with the FHFA to resolve the lawsuits, some banks have already been successful in reaching a settlement. Among these, are Citigroup, which agreed to the settlement of an undisclosed amount and UBS, which conceded to pay $885 million.

Additionally, JPMorgan is facing investigations from the Department of Justice (:DOJ) and the Securities and Exchange Commission (:SEC). In May 2013, the company received a notice from the Civil Division containing the preliminary inquiry’s conclusion, which declared the company guilty of violating several federal security laws at the time of selling residential MBS during 2005–2007.

As a matter of fact, JPMorgan faces several lawsuits related to its conduct preceding the financial crisis. If the company is required to pay $6 billion to settle the case, it will increase its legal expenses. Notably, at the end of second-quarter 2013, the company increased its anticipated legal losses (exceeding its existing litigation reserves) to $6.8 billion from $6.0 billion in the prior quarter.

Currently, JPMorgan carries a Zacks Rank #3 (Hold).

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