JPMorgan Chase has secured important concessions in a $13 billion settlement over its mortgage practices, allowances that could ultimately reduce the bank’s financial burden and leave the government itself on the hook for a small portion of the cost.
The concessions emerged on Friday in an agreement with one of the federal regulators suing JPMorgan, the nation’s largest bank. The regulator, the Federal Housing Finance Agency, ran ahead of a broader deal that the Justice Department and other authorities were negotiating with the bank.
The housing agency, which oversees Fannie Mae and Freddie Mac, extracted a $5.1 billion payout on Friday.
But unlike other regulators pursuing the bank, it did not require JPMorgan to admit wrongdoing. And in a provision buried in the settlement, the agency effectively allows JPMorgan to try later to recoup about $1 billion from another federal regulator: the Federal Deposit Insurance Corporation.
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In a statement, JPMorgan called the deal “an important step towards a broader resolution” with the Justice Department and the other government authorities.
And for its part, the housing agency, while not responding to questions about the wording of the agreement, also heralded the settlement. “This is a significant step as the government and JPMorgan Chase move to address outstanding mortgage-related issues,” Edward J. DeMarco, the acting director of the housing agency, said in a statement. Yet the housing agency’s announcement also suggests that the government may be split over how to punish the bank for misrepresenting the quality of mortgage securities it sold to investors before the 2008 financial crisis. The Justice Department, which has orchestrated the $13 billion settlement, is conversely demanding that JPMorgan not pass on its liabilities to the F.D.I.C.
JPMorgan has been locked in a legal battle with the F.D.I.C. over mortgage securities sold by Washington Mutual. In a deal that the F.D.I.C. orchestrated, JPMorgan bought the failed bank at the height of the financial crisis in 2008, just months after it acquired Bear Stearns. By JPMorgan’s account, the F.D.I.C. agreed that it would shoulder some liabilities from Washington Mutual. The agency disputes that notion and is fighting the bank in court.
The bank’s legal stance has now carried over into the negotiations over the $13 billion mortgage settlement.
Because the settlement deal with the housing regulator involves mortgage securities sold by Washington Mutual, JPMorgan could try to push some of the settlement cost onto the F.D.I.C. And the deal with the housing agency does not explicitly prevent the bank from doing so.
“Nothing in this agreement shall be used as an admission or concession that JPMorgan,” the deal said, “contractually assumed or is otherwise liable for any alleged liabilities or wrongdoing of Washington Mutual Bank.”
Armed with that wording, JPMorgan could file a claim against Washington Mutual’s receivership fund, which is maintained by the F.D.I.C. Such a claim could be for more than $1 billion, given that Washington Mutual accounted for a third of the disputed mortgage securities. It is unclear whether the bank would receive the full amount. The receivership contains about $2.7 billion, according to the F.D.I.C.’s Web site. And it already faces other large claims.
The settlement with the housing agency does prevent JPMorgan from making any claim on the agency’s deposit insurance fund. But some government officials worry that if JPMorgan consumes what’s left of the receivership, a few other claimants could take the bold step of pursuing the insurance fund.
The Justice Department, which wants to include other Washington Mutual-related investigations into the $13 billion deal, continues to fight with the bank over the F.D.I.C.
Some bank lawyers questioned whether it is fair for the $13 billion settlement to include any payouts related to Washington Mutual. The company, the lawyers argued, sold the dubious securities before JPMorgan bought it.
As both sides continued to wrangle over a final deal, the housing agency decided to announce its own settlement. By settling now, people briefed on the talks said, the agency can move on to negotiating with other banks it has sued.
For JPMorgan, the housing regulator settlement resolves only one element of the bank’s legal woes. The bank, which is also facing investigations into whether it turned a blind eye to Bernard L. Madoff’s Ponzi scheme and hired the sons and daughters of China’s elite to win business in that nation, said earlier this month that since 2010 it had set aside $28 billion for litigation expenses.
Still, the housing regulator’s case was one of the costliest.
In a 2011 lawsuit, the regulator accused JPMorgan, Bear Stearns and Washington Mutual of misrepresenting the quality of the mortgage securities to Fannie Mae and Freddie Mac, the government-controlled housing finance companies. The banks, the agency claimed, did not fully disclose the risks of the securities, which ultimately imploded.
To settle the mortgage securities case, the bank paid $4 billion. It paid another $1.1 billion to the regulator to settle demands that the bank repurchase soured loans it sold to Fannie Mae and Freddie Mac from 2000 to 2008.
The $13 billion deal with JPMorgan also involves a number of other state and federal authorities. Under the current terms, the bank would pay a roughly $2 billion fine to prosecutors in California, commit $4 billion to help struggling homeowners reduce their mortgage balances and dole out billions more to state attorneys general and other officials who will then funnel the money to investors who sustained losses on mortgage securities.
The deal could embolden the Justice Department as it takes aim at other big banks suspected of similar mortgage breakdowns. Using the JPMorgan case as a template, the Justice Department is planning to take action against other big banks suspected of selling troubled mortgage securities, people briefed on the matter said.
The Justice Department’s cases rely on a law that extends the legal deadline for filing certain financial fraud cases to 10 years from five. The law also led a federal jury this week to find Bank of America liable in a mortgage case.
A spokesman for Eric T. Schneiderman — the New York attorney general who is expected to collect more than $500 million from JPMorgan — praised the housing regulator’s pact on Friday. “Five years after the financial crisis, it is critical that we continue to share resources to maximize the relief provided to struggling homeowners and ensure accountability for those who created the crisis in the first place,” said the spokesman, Damien LaVera.