JPMORGAN REVEALS HOW IT FORMED MORTGAGES

c.2013 New York Times News Service

JPMorgan Chase and the Justice Department reached a record $13 billion settlement Tuesday, wrapping up a series of state and federal investigations that offer a rare glimpse into Wall Street’s mortgage machine before the financial crisis, when it churned out billions of dollars in securities that later imploded.

At the heart of the civil settlement, which materialized after months of wrangling, is a statement of facts negotiated with the government that provides details into how JPMorgan assembled mortgage securities sold from 2005 through 2008. While the bank did not admit any violations of law, its decision to approve the statement was one of a few critical concessions it made in order to strike the deal.

The statement shows that, as JPMorgan packaged the residential mortgages into complex securities, the bank promised to alert investors to any flaws that might raise questions about the loans, according to the statement.

Investors relied on the bank to vet the underlying loans, which mortgage lenders across the country originated with varying degrees of quality. Still, investors were kept in the dark, the government’s statement found.

They were told, the statement of fact says, that the lenders originating the mortgages had “solid underwriting platforms” and that JPMorgan itself would provide another level of assurance by ensuring that the loans were independently scrutinized.

To do that, the bank hired Clayton Holdings and other third-party firms to examine the loans before they were packed into investments.

But even when problems were found, JPMorgan sometimes ignored the warnings. According to the statement of facts, an analysis for JPMorgan performed from the first quarter of 2006 through the second quarter of 2007 on 23,668 loans found that 27 per cent should have been categorized as “event 3,” meaning that they did not meet underwriting standards. Still, JPMorgan ultimately decided to accept the loans anyway or altered their classification to a higher rating.

For JPMorgan and its chief executive, Jamie Dimon, the deal allows the bank to move past one of its biggest legal headaches. And despite paying a string of banner settlements this year, the bank’s board remains steadfastly behind Dimon, who holds the dual roles of chairman and chief executive. That support traces to a widespread belief among board members that the deals represent a victory for the bank as it tries to move past its woes.