Some banks have a knack for always being in the news for the wrong reasons. For JPMorgan Chase, the latest news regarding its nefarious foreclosure and mortgage habits is par for the course.
The Federal Housing Finance Agency, the regulator in charge of government-sponsored enterprises like Fannie Mae and Freddie Mac, announced that it will pursue a $6 billion settlement from the New York City-based multinational bank for bad mortgages the bank allegedly sold to investors.
According to claims, JPMorgan Chase bank misrepresented the credit-worthiness and investment quality of mortgage-backed securities that it offered to investors, including Fannie Mae and Freddie Mac (hence the FHFA’s involvement). The securities that were sold were based on subprime mortgages that did not meet criteria for investors that would indicate the assets were sound investments.
Instead, the underlying mortgages were rotten and failed spectacularly when the market collapsed. As a result, the value of the mortgage-backed securities guaranteed by JPMorgan Chase plummeted, costing investors like Fannie Mae and Freddie Mac a bundle.
JPMorgan Chase specifically is at fault, says FHFA, because they intentionally misled investors about the quality of the mortgages supporting the securities. JPMorgan Chase, for its part, disagrees about how liable they are, citing the fact that many of these securities were actually sold by banks that JPMorgan Chase acquired after the fact – banks like failed institutions Bear Stearns and Washington Mutual.
This isn’t the only trouble for JPMorgan Chase at the moment. They were sued two years ago for essentially the same mortgage-related issue and were also a part of the massive foreclosure fraud settlements from 2011. Also, they are being investigated for allegedly manipulating U.S. energy markets by the Department of Justice.
JPMorgan Chase may have to pay $6 billion, but the banking giant will probably be fine; it made over $6 billion in profit in each of the previous two quarters.
It is disturbing to note that the instrument behind this settlement case – subprime mortgages – may actually be back on the rise. Subprime mortgages are mortgages granted to individuals who have a less-than-stellar credit profile, typically below 600, that usually come with a higher interest rate. The market collapse of 2006-2007 was primarily caused by an avalanche of subprime mortgages that went sour and caused other, healthier mortgages to lose value rapidly.
Needless to say, regulators need to continue to watch big banks like JPMorgan Chase for the same actions that caused catastrophe for the housing market only a few years ago.