JPMorgan agrees to $13 billion settlement over mortgages

JPMorgan Chase & Co. has agreed to a record $13 billion settlement over mislabeled mortgage securities that federal and state authorities said stoked the financial crisis, the Department of Justice announced Tuesday.

The deal includes $9 billion in payments to authorities and $4 billion in relief to consumers – mainly homeowners – harmed by the conduct of JPMorgan and the two failed banks it took over during the crisis, Bear Stearns and Washington Mutual.

The bank "acknowledged it made serious misrepresentations to the public – including the investing public" over the quality of residential mortgage-backed securities (RMBS) it sold ahead of the financial crisis, the Justice Department said in a statement.

As the housing market collapsed between 2006 and 2008, millions of homeowners defaulted on high-risk mortgages. That led to billions of dollars in losses for investors who bought securities created from bundles of mortgages. Those securities were sold by JPMorgan and other big Wall Street banks.

"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said. "JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm's behavior."

Goldman Sachs, Citigroup and other big banks have similarly been accused by the Securities and Exchange Commission (SEC) of deceiving investors in sales of mortgage securities in the runup to the crisis. Together they have paid hundreds of millions in penalties to settle civil charges brought by the SEC.

The agreement eclipses the previous record government fine of a private corporation and resolves a major part of a series of complaints against the largest U.S. bank over mortgage securities that caused huge investor losses.

The fine comes after months of tough talks between regulators, justice authorities and the bank. At one point at the end of September, when the Justice Department was reportedly hours away from suing the bank, JPMorgan Chairman and CEO Jamie Dimon met in Washington with Holder to keep the deal discussions going.

"We are pleased to have concluded this extensive agreement with the President's RMBS Working Group and to have resolved the civil claims of the Department of Justice and others," Dimon said in a statement.

The agreement announced Tuesday clears most of the civil allegations over mortgage securities against the banks. However, the Justice Department said the deal still does not absolve the bank or its employees from possible criminal charges.

"Through this $13 billion resolution, we are demanding accountability and requiring remediation from those who helped create a financial storm that devastated millions of Americans," Associate Attorney General Tony West said in a statement.

New York Attorney General Eric Schneiderman, who co-led a task force investigating JPMorgan and other banks over losses the federal government and states incurred on mortgage securities, called the settlement an "historic deal which will bring long-overdue relief to homeowners around the country and across New York."

"We refused to allow systemic frauds that harmed so many New York homeowners and investors to simply be forgotten," he said. "And as a result we've won a major victory today in the fight to hold those who caused the financial crisis accountable."

The complex deal includes claims and penalties to be paid to the Justice Department, the National Credit Union Administration, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency (FHFA) and the states of California, Delaware, Illinois, Massachusetts and New York.

The $4 billion for consumer relief requires JPMorgan to forgive some of the principal on many customers' loans and modify others to improve conditions for borrowers. According to the Justice Department statement, the relief will also include "targeted originations and efforts to reduce blight."

If it fails to follow through adequately in the latter requirements, the agreement says, the bank will have to pay damages to the nonprofit group NeighborWorks America, which supports affordable housing.

"Abuses in the mortgage-backed securities industry helped turn a crisis in the housing market into an international financial crisis," said Benjamin Wagner, U.S. attorney for the Eastern District of California.

The settlement was the latest in a series of government actions over mortgage securities, which were a major component of the financial sector meltdown that, together with the collapse of the housing sector, plunged the economy into deep recession in 2008 and 2009.

In addition to the $4 billion for the FHFA in Tuesday's deal, JPMorgan separately has to pay the agency – which oversees mortgage giants Fannie Mae and Freddie Mac – $1.1 billion for selling them poor-quality mortgages.

Last week, JPMorgan reached a tentative deal to pay private-sector investors $4.5 billion for losses on mortgage securities.

Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year's third quarter, the first under Dimon's leadership. The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the series of legal cases against the bank. JPMorgan said it has placed $23 billion in reserve to cover potential legal costs.

Al Jazeera and wire services