Mortgage securities issuers ‘liable for billions’
JPMORGAN Chase’s rivals may face government lawsuits claiming tens of billions of dollars in damages tied to investor losses on mortgage bonds after New York’s attorney-general filed a fraud lawsuit against the biggest US bank by assets.
A state and federal task force set up this year to investigate misconduct in the bundling of mortgage loans into securities would bring to light other cases, New York attorneygeneral Eric Schneiderman said on Tuesday.
Investor losses in the JPMorgan case alone would be “substantially more” than the $22.5bn cited in his complaint, he said.
“We do expect this to be a matter of very significant liability, and there are others to come that will also reflect the same quantum of damages,” Mr Schneiderman said. “We’re looking at tens of billions of dollars, not just by one institution, but by quite a few.”
Mr Schneiderman alleged the Bear Stearns business that JPMorgan took over in 2008 had deceived mortgage-bond investors about defective loans backing securities they bought. Bear Stearns failed to evaluate loans, ignored defects uncovered and “kept investors in the dark” about review procedures and problems with the loans.
The Bear Stearns mortgage unit packaged $212bn in mortgage bonds from 2003 to 2006, according to the state’s complaint. Losses on $87bn of those bonds packaged during just two of those years total $22.5bn so far, it estimated.
The case targets mortgage securitisations between 2005 and 2007 involving “Alternative A” and subprime mortgages, Mr Schneiderman said. It would take further investigation to determine the full extent of the losses. “There are further losses being incurred,” according to Mr Schneiderman, who called the case a “template” for cases against other issuers of mortgage securities.
Joe Evangelisti, a JPMorgan spokesman, said the New Yorkbased bank would contest the state’s complaint, which was “entirely about” conduct by Bear Stearns.
JPMorgan acquired Bear Stearns in March 2008 after a run on what was then Wall Street’s fifth-largest securities firm.
“We’re disappointed that the (attorney-general) decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs,” Mr Evangelisti said in an e-mail.
The case is the first legal action by the state-federal task force set up by President Barack Obama this year to probe claims related to packaging mortgage loans into securities.
The top issuers of mortgage securities without government back- ing in 2005 included Bank of America’s Countrywide Financial unit, GMAC, Bear Stearns and Washington Mutual, according to trade publication Inside MBS & ABS. Total volume for the top 10 issuers was $672bn. JPMorgan acquired Washington Mutual in 2008.
Countrywide ranked as the top issuer of the securities in 2005, 2006 and 2007, when the worst-perform- ing debt was created, according to Inside MBS & ABS. The lender created $405bn of the $3.04-trillion of bonds sold in those years.
JPMorgan, with Bear Stearns and Washington Mutual, were facing lawsuits and claims against mortgage-related deals totalling $120bn, the bank said in a regulatory filing. In the first quarter, JPMorgan had a $2.5bn pretax expense for additional litigation reserves, mostly mortgage related, a charge that knocked 39c a share off its profit. The quarter’s actual litigation expense was $2.7bn.
As of March 31, the bank estimated its outstanding mortgage repurchase liability at $3.5bn, an amount already recognised in earnings, according to the quarterly filing. Litigation reserves might need to be increased, the bank said.
Among JPMorgan’s competitors, Citigroup, the third-biggest bank by assets, “continues to co-operate fully” with regulators and law enforcers in response to subpoenas and information requests related to its mortgage activities, the bank said in its latest quarterly filing. It did not specify the cases.
Goldman Sachs Group, the fifthbiggest bank, had received subpoenas and requests for information from state and federal law enforcers and regulators over mortgagerelated securitisation and subprime mortgages and was co-operating with them in their inquiries, the bank said in its latest quarterly filing.
A Securities and Exchange Commission probe of $1.3bn of subprime residential mortgage-backed securities underwritten in 2006 by Goldman was ended without enforcement action, the bank said. Bloomberg