Mega bank JPMorgan Chase (JPM) signed an agreement with government agencies to end all existing legacy mortgage-backed securities issues for $13 billion.
New York Attorney General Eric Shneiderman, who co-chairs a working group overseeing legacy mortgage investigations, announced the deal, calling it the largest settlement with a single entity in American history.
Schneiderman chairs the RMBS working group, which has spent the past year investigating RMBS issues on behalf of state and federal regulators. The bank reached the deal with the RMBS Working Group, the Department of Justice, and countless other agencies.
The settlement reportedly resolves federal and civil claims related to the bank’s packaging, marketing, sale and issuance of mortgage-backed securities prior to the housing downturn. It also covers legacy issues left over from Bear Stearns and Washington Mutual, two entities JPM took over in the wake of the financial meltdown.
As part of the final agreement, JPMorgan will pay $9 billion, while also providing $4 billion in consumer relief in the form of loan modifications for borrowers at risk of foreclosure.
New York state alone will receive $1 billion from the settlement, including $613 million in cash and another $400 million in consumer relief for struggling borrowers in the state.
Some of the aid will fund families impacted by Superstorm Sandy, with the rest going to legal services and counseling for distressed New York homeowners.
The RMBS Working Group that Schneiderman co-chairs helped usher in the deal. The organization is a joint state and federal effort launched back in 2012 to engage several agencies in the fight against legacy RMBS issues. Those entities include the Department of Justice and various federal and state law enforcement groups.
"Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy," said Attorney General Schneiderman in a statement. "This historic deal, which will bring long-overdue relief to homeowners around the country and across New York, is exactly what our working group was created to do."
The agreement officially ends a lawsuit that Schneiderman filed against JPMorgan Securities, JPMorgan Chase Bank and EMC Mortgage back in October 2012.
JPMorgan Securities and EMC, which used to be known as Bear Stearns & Co. and EMC Mortgage Corp. before JPM took the firms over, were facing fraud investigations for violations of the Martin Act. Authorities alleged the entities packaged and sold RMBS using material misrepresentations about the quality of the underlying mortgages.
The agreement also terminates all pending civil enforcement investigations launched by the DOJ and attorneys general in California, Delaware, Massachusetts, Illinois and New York. Litigation claims brought by the FDIC, FHFA and NACU also face immediate elimination when the deal goes through.
As part of its settlement, JPMorgan admitted it "regularly misrepresented to RMBS investors that the mortgage loans in various securities complied with underwriting guidelines," the NY AG confirmed.
But is a settlement of this size good for the bank?
Banking analyst Christopher Whalen said it's an expected step for the firm.
"If you can see yourself sitting on the board of JPM, they would clearly want to get this done this year," Whalen explained. As far as how investors will react, Whalen sees this as a distraction.
"It's not what I would be looking at if I was an investor," he said. "It's noise. They need to be focused on the fundamentals of the banks."
The settlement features multiple smaller deals, including one with the Federal Deposit Insurance Corp., which alone will receive $515.4 million as the receiver of six failed banks.
JPM also agreed to waive any claims of indemnification from the FDIC in its capacity as receiver for the failed Washington Mutual Bank.