When J.P. Morgan Chase & Co. (JPM) announced its $13 billion settlement with the Department of Justice and various regulatory agencies over legacy mortgage issues in October, the megadeal captured headlines, with many wondering if it marked a definitive end to the mortgage industry's larger litigation merry-go-round.
As part of the deal, the company effectively ended claims over alleged misrepresentations made on mortgages sold off by the bank and affiliated entities prior to the financial crisis.
The megadeal effectively ends outstanding cases filed against JPM by the Department of Justice, various attorneys general, the Federal Housing Finance Agency, the Federal Deposit Insurance Corp. and the National Credit Union Association. But the question is whether the deal marks an end point for JPMorgan Chase litigation and massive legacy mortgage- backed securities litigation against the banks overall.
Banking analysts quickly pointed to a summary of the facts that JPM signed as part of the deal. While the bank made no admission of guilt, its settlement and the agreement itself speak volumes.
“I think the company agreed to the statement of facts — that 11-page document that was released by the Justice Department,” said Dick Bove, a banking analyst with Rafferty Capital Markets. “Based on the statement of facts, they have agreed that they did underwrite and sell mortgages that fell below their mortgage underwriting criteria.”
This alone will create plaintiff shopping, he believes. The Justice Department also reserved the right to pursue criminal charges on any remaining issues over other mortgage servicing issues not yet resolved.
Bove is not alone in this assessment. Investors grew a bit shaky after the deal. The settlement failed to resolve everything for the bank, said Nancy Bush, a bank analyst with NAB Research, claimed. She views remaining litigation as a potential impediment going forward.
“We would have hoped that the $13 billion (settlement) would have added certainty, and in some regards it did,” she told HousingWire at the time. But Bush pointed out that JPM signed a statement of facts outlining some of the issues it — as well as Bear Stearns and Washington Mutual — had with mortgage-backed securities during the representation process.
“There is a concern that the statement of fact which alleges some nasty things will open the doors to class-action lawsuits,” she explained. “It will be red meat in front of the plaintiffs’ lawyers.”
So who may try to take the settlement terms and push for other cases? The answer could be state attorneys general who are not part of the existing deal and any other parties whose issues over MBS were not addressed in the latest settlement, experts say.
But the big issue is the perpetual litigation carousel that mega servicers and big banks simply cannot avoid.
It’s impossible to know when it’s all going to end, says Peter Henning, professor of law at Wayne State University Law School. But he’s not so sure the statement of facts that JPMorgan signed puts them on the legal hook either.
“The statement of facts is very well-crafted,” Henning said. “What they did is they acknowledged the statement of facts, but did not admit to any violations. This is what lawyers do — slice things up as finely as possible.”
Henning said it is possible that future litigants can use the statement of facts as an example of “how poor a job they did” in other securities cases, so it’s not exactly a good thing. But the aim of the JPMorgan settlement was to cast a wide net and get as much of this behind them as possible.
The recent settlement doesn’t end “the entire universe of securitization,” the law professor noted, “but it doesn’t mean that they’ve lost; they can still fight.”
And while $13 billion is a big number for one bank, if you add in all the other major mortgage settlements already issued, the number doesn’t seem quite as large. It’s more par for the course.
For instance, back in February 2012, five big servicers — JPMorgan Chase, Bank of America, Ally/GMAC, Citi and Wells Fargo — entered into a $25 billion settlement with 49 state attorneys general and the federal government over allegations of shoddy foreclosure processing issues. The deal provided relief funds for state AGs and various borrowers.
But was it enough to get legacy issues behind the banks? Not really. The settlements and cases kept coming. Just recently the Department of Housing and Urban Development Secretary Shaun Donovan looked over the results of recent servicing compliance tests run by the monitor of the $25 billion settlement and found at least three banks failing key tests — among them JPM, Bank of America and Citi.
And these banks are not just dealing with servicing litigation; lawsuits over alleged misrepresentations made over representations and warrants during the sale of loans for securitization keep popping up, as they have been for the last few years.
In 2011, BofA proposed a controversial $8.5 billion settlement with investors to get legacy mortgage bond issues behind it. The case ended up at the center of a massive dispute, with investors claiming the amount was too low to compensate interested parties.
Another point of contention surfaced this year when Bank of America set aside $14.1 billion for reps and warrants litigation — raising questions about how much settlement and litigation exposure the bank faces in the MBS dispute.
But that’s not nearly the end of it; the numbers keep rolling in.
The National Credit Union Administration also sued several big banks over losses stemming from their sale of RMBS to individual credit unions that NCUA represents. Earlier this year, BofA agreed to settle NCUA’s case against the bank for $165 million.
Deutsche Bank Securities also inked a deal with the NCUA to pay $145 million to cover losses associated with the failure of five credit unions that purchased RMBS. One of the largest settlements for NCUA came as part of the massive JPM settlement, with $1.417 billion out of the $13 billion deal slated to compensate the credit union association for lawsuits it filed as the liquidating agent handling losses incurred by credit unions over the purchase of faulty mortgage securities.
The settlement involved securities tied to two firms that JPMorgan took over — Bear Stearns and Washington Mutual.
The problem is the litigation carousel seems never ending — one settlement leads to another. Ever since the housing market tumbled into oblivion in 2007 — only to recover five years later — it seems every mega settlement entered into by the larger banking institutions over mortgage issues has done nothing but spur along more cases.
At one point, a banking analyst even joked that divisions of the federal government might as well park their trucks outside the bank’s gates and unload the cash. But there is a question begging for an answer: When does this all end? When will litigants have enough — and does one settlement just encourage more litigation, or will there finally be an end point?
“The banks keep hoping they are done, but there is still litigation out there involving the banks,” Henning said. “You just keep seeing settlement after settlement, and at some point, it has to end.”
He believes the banks feel as if they’ve taken care of the major cases, and at some point, the five-year statute of limitations is going to make it impossible for litigants to file more cases.
“If cases are going to be filed, it should happen within the next year,” Henning said. “I would expect the settlements to be done within two years, but I cannot say for sure.”
But one thing is clear — the cases do little to help all the borrowers that attorneys general and other plaintiffs are usually citing in their cases. In the final independent foreclosure review settlement, which resolved servicing issues once and for all with 14 big servicers for $9.3 billion, some of the alleged foreclosure victims received as little as $300 apiece, while attorneys siphoned off millions of dollars.
The big consultants on that deal — charged with reviewing the cases — ended up with billions in total fees. Henning admits most of the big cases involve sophisticated investors, not your average borrower.
“What the government is trying to go for is a sense of rough justice,” he noted. But when you retrace the history of the mortgage crisis, the settlements also suggest the government hasn’t learned its own lesson.
One of the parts of the JPMorgan settlement requires the bank to provide affordable lending options to hard-hit communities, or areas that have trouble obtaining lending products. What’s striking about this is the fact that prior to the MBS and mortgage crisis, the government spent a considerable amount of time encouraging this same type of lending.
In 2003, signing statements of George W. Bush showed the president pushing for more lending — following in the footsteps of President Clinton before him.
When signing the American Dream Downpayment Act, Bush said, “The law I sign today will help us build on this progress in a very practical way. Many people are able to afford a monthly mortgage payment but are unable to make the down payment, and so this legislation will authorize $200 million per year in down-payment assistance to at least 40,000 low-income families. These funds will help American families achieve their goals and, at the same time, strengthen our communities.”
A few years before that, President Bill Clinton espoused similar views in the year 2000: “We’re also taking action to increase loan limits from the Federal Housing Administration by nearly 9% to help more working families to own their first home. Since 1993, the FHA program has given more than 4 million Americans that chance. We have made real progress.”
Now that the government is pinging the major banks for the mortgage crisis, it’s ironic that the JPMorgan settlement also includes provisions forcing the bank to provide so much lending to communities lacking easy access to housing.
“The government would say — but only make good loans,” Henning offered. But in reality, the government is doing what it did before.
It’s asking the banks not to take excessive risks, but “you only know a risk is excessive when things go south,” he explained. “It’s certainly contradictory to say you packaged too many bad loans, so now go out and make loans to the same kind of people whose mortgages are going bad.”
The reality is the settlements keep this never-ending carousel effect going. Essentially, the banks and government want this all past them, but that day is not coming soon enough.