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JP Morgan Mortgage Fraud: Comments and Questions

Posted by Larry Doyle on October 2, 2012 8:58 AM |

Is yesterday’s announcement that the New York Attorney General (on behalf of the President’s Residential Mortgage-Backed Securities working group) is suing JP Morgan for fraud in selling mortgage-backed securities during 2006 and 2007 America’s long overdue call for justice?

Here is a copy of the suit. A few comments and questions.

First off, the activity in question occurred at Bear Stearns and not JP Morgan. JPM purchased Bear in the spring of 2008. I have long believed that selected parts of the mortgage origination process on Wall Street rose to the level of a racketeering enterprise. 

Although widely promoted as a charge against JPM (Bear Stearns), the suit also specifies the mortgage origination unit at Bear, an entity known as EMC located in Texas.

Why is this merely a civil suit? In reviewing the suit and in light of all that we know occurred in the origination and sales of mortgages during this time period, one is hard pressed to believe that there was not very real criminal activity involved in these operations. Not one single individual is named on the defendant’s side of this suit.

The suit lays out in spades the amazing lack of due diligence and real quality controls in place at EMC. Additionally, the suit highlights the pressure placed on the originators at EMC by New York based executives thirsting for more and more volume seemingly with little regard for quality in the process.

What do I see as the most serious allegation in this suit? Starting on page 26, we learn the following:

Defendants Breached Their Obligations to Repurchase Defective Loans From Securitizations While Secretly Settling Claims with Originators and Pocketing Recoveries

Although loan originators were contractually required to buy back defective loans at an agreed-upon repurchase price, Defendants routinely permitted them to avoid this obligation by extending cheaper or otherwise more appealing alternatives. Specifically, Defendants offered substantial concessions to originators in order to preserve Defendants’ relationships with them and to ensure the continued flow of loans.

For example, “in lieu of repurchasing the defective loans,” originators were permitted by Defendants to confidentially settle EPD and other claims by making cash payments that were a fraction of the contractual repurchase price. Defendants’ other concessions included agreements to cancel or waive entire claims against originators, and the creation of “reserve programs” under which Defendants used funds collected from these originators towards future
loan purchases.

According to an internal presentation, during the period May 2006 to April 2007 alone, Bear Stearns resolved $1.9 billion worth of claims against sellers relating solely to EPDs (early payment defaults). As a further accommodation to originators, Defendants also agreed to extend the EPD period so that already-securitized loans that had defaulted during the designated EPD period, and then started paying again, could remain in the securitization. This allowance was made despite defendants’ recognition that an EPD is a strong indicator not only of a borrower’s inability to repay but also of fraud in the origination. Notably, Defendants’ extension of the EPD period applied only to securitized loans; extensions of the EPD period for loans in Defendants’ own inventory were expressly forbidden.

Defendants were contractually obligated to give prompt notification to investors of any breach that materially and adversely affected investors, such as fraud in connection with loan origination or the failure to underwrite a loan in accordance with underwriting guidelines. Defendants were also required to repurchase defective loans from securitizations. Defendants not only failed to fulfill their contractual obligations; according to the testimony of one senior Bear Stearns manager, Defendants collected and retained the recoveries they obtained from their undisclosed settlements with originators.

Defendants kept settlement amounts for themselves rather than depositing the settlements into the relevant RMBS trusts, and failed to disclose that they were recovering and pocketing money from originators for settled EPD claims on loans that remained in their RMBS Trusts.

Would an intelligent individual define this activity as anything more than out and out theft? One does not need more than a high school equivalency to understand that activity as blatant theft.

One final question. Why now? Why is this suit brought at this juncture?

I personally believe the Feds are pursuing these cases at this juncture in a very coordinated fashion with the recently announced program to pump $40 billion per month into the market via the Federal Reserve’s QE3 program. The banks are benefiting from that program because the prices for mortgage securities sold to the Fed have soared while rates to the borrower have barely budged. Cha-ching, cha-ching for the banks. Just in time to increase revenues and settle this suit and the inevitable other suits to follow.

The rackets continue but will there be real justice. Or will this suit and these charges be just another day in The Twilight Zone.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • David T

    I also wonder “why now?” Might it also have something to do with the elections? Not only does BO look like he’s doing something FINALLY, but it’s my guess that he has gotten all the money he’s going to get from Jamie Dimon, so he could afford to turn on JPM now. DT

  • Peter Scannell

    I thought then SEC Director of Enforcement Linda Thomsen gave her former boss, J.P Morgan General Counsel Stephen Cutler and the former SEC Enforcement Director, assurances that Bear Stearns was not going to be subject to regulatory scrutiny.

    It just goes to show you that not all non-public information is a lock!

  • fred


    1) Gov’t sponsored programs are now allowing sub prime/non current mortgages underwritten during this period to refi/restructure.

    2) Lower rates and state settlements are now allowing “neg equity” primes to refi with their lender.

    3) The Fed will be buying massive amounts of performing/non performing MBS thru QE3.

    There seem to be a major push to get mortgages underwritten in 2005-2007 “off the books” of banks (current, underwater or otherwise).

    Questions: What constitutes a defective mortgage? If a mortgage is found to be defective, can ownership of the property pass to the mortgagee before full execution?

    Give it to me straight LD. Should I refi or hold on?

    • Obsvr-1

      Take advantage … RiFi NOW, but negotiate a streamlined process (lowest fees)
      and put as little as possible money into the house; if you could get a 100% loan to value (fairy tale these days) DO IT.

  • LD


    Great insights. Thanks for highlighting them.

    I would have to think that if you have not yet refinanced your mortgage or even if you have that the current rate/money should be taken.

    I do agree that the QE3 is largely being utilized to clear the decks of the banks that remain chock filled with a lot of poorly underwritten (garbage) mortgages.

  • Obsvr-1

    Why Now ?
    This can not be positioned as a political move by Obama, since this is a lawsuit by the State of NY — MSM will not highlight the disastrous DOJ and the feckless leader Holder as not going after the FIRE industry post crisis. All the states should exercise their rights to sue the TBTF, as the 25B settlement left an opening for further litigation.

    JPM should absolutely be held responsible for the actions of Bear Stearns, as JPM stepped into the shoes of Bear Stearns. I am sure that the execs at Bear Stearns all walked away with indemnification umbrellas like the “Orange Malfactor on Steroids” – Angelo Mozilo did with BofA. It is a travesty of justice that these guys are not in jail and haven’t had all their wealth clawed back.

    • LD


      Thanks for the insights. I do include the New York state AG under the heading of the Feds although I probably should have been more explicit.

      I do not discount that JPM has ownership responsibilities of past Bear legal exposures and liabilities.

      Reading the passage I highlighted and thinking that no single individuals might/will be held accountable should sicken those who care about real justice in our nation.

    • Obsvr-1

      I stand corrected:

      The case against JPMorgan Chase (JPM, Fortune 500) is the first by President Obama’s Residential Mortgage Backed Securities working group, which was formed in January. It includes the Justice Department, the Securities and Exchange Commission, the New York Attorney’s General’s Office, as well as the Federal Housing Association Inspector General.

      OK – Obama is making a political move ….But, this should have been done throughout 2009 – now ….

  • Joyce

    Dear Mr. Doyle,

    Are you surprised at this obscene corruption? Am still sick about the LIBOR outrage. Our system is not only financially bankrupt, but morally as well. Except in the case of we, the people who, with one peep, can be jailed indefinitely as enemy combatants. Be a good “Patriot” and stop questioning the “higher power.”

    Did I read right that Eric Holder was previously an attorney in the private sector who represented Jon Corzine? Was he in a coma then as now?

    • LD

      NOTHING surprises me anymore. The fact is a self-regulatory model of financial oversight on Wall Street is just the measure needed for pols and the industry to take ordinary investors, consumers, and everyday Americans to the cleaners.

      I do believe that AG Holder’s firm represented Mr. Corzine. Can you smell the rancid incest?

  • BR

    Throw another log on the fire.

    German bank sues Wells Fargo alleging $1.5 billion Securities Fraud

    San Francisco Business Times by Mark Calvey, Senior Reporter
    Date: Tuesday, October 2, 2012, 2:55pm PDT

    Mark Calvey
    Senior Reporter- San Francisco Business Times

    European bank LBBW Luxemburg S.A. said it sued Wells Fargo, alleging $1.5 billion in securities fraud involving residential mortgage-backed securities.

    The suit, filed Sept. 28 in federal court in New York, charges that Wells Fargo Securities, formerly Wachovia Capital Markets,sold $1.5 billion in highly rated securities to LBBW and others even though Wells (NYSE: WFC) had determined that the underlying mortgages “were not worth the purchase price and were riskier than promised,” according to Houston law firm Ahmad, Zavitsanos, Anaipakos, Alavi & Mensing, which is representing LBBW, a subsidiary of German bank Landesbank Baden-Wurttemberg.

    The suit also names New Jersey-based Fortis Securities as a defendant.

    “We believe that the allegations have no merit and we will defend ourselves vigorously,” said Wells Fargo spokesman Ancel Martinez.

    Wells acquired Wachovia in 2008, during the depths of the financial crisis.

    LBBW’s attorneys said the alleged securities fraud came to light only after a Securities and Exchange Commission probe into a $5.5 million investment made by the Zuni Indian Tribe’s employee pension fund.

    “Wachovia tried to squeeze every penny out of a deal they knew was bad,” said David Warden, one of the AZA attorneys representing LBBW. “Their greed was the very act that allowed investors to realize the misrepresentations Wachovia made to close a deal that had already gone sour.”

    Mark Calvey covers banking and finance for the San Francisco Business Times.

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