$13B Penalty For JPMorgan

The Record ( — Wednesday, November 20, 2013

By Danielle Douglas
The Washington Post

After months of tense negotiations, the Justice Department on Tuesday finalized a record $13 billion settlement with JPMorgan Chase to resolve allegations that the bank knowingly sold faulty mortgage securities that contributed to the financial crisis.

This marks the largest penalty ever levied against a single company and represents a colossal win for the government after years of public criticism over its struggle to hold Wall Street accountable for crisis-era sins. It is also a tremendous black eye for a bank once lauded as the nation's strongest financial institution to emerge from the crisis.

"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said.

The agreement puts to rest multiple state and federal probes into JPMorgan's sale of mortgage securities to investors. But it still leaves the bank and its executives at risk of criminal prosecution for fraud.

Like other banks, JPMorgan bundled hundreds of home loans into securities and marketed them as investments that could be traded like stocks. When homeowners defaulted on their mortgages in droves, the value of the securities plummeted and investors were saddled with huge losses. Government authorities subsequently launched probes into whether the banks misled investors about the risks and the quality of the securities.

The most complex component of the JPMorgan settlement involves $4 billion in aid directed to distressed homeowners. People close to the negotiations say Justice's lead negotiator, Associate Attorney General Tony West, worked over the weekend with Department of Housing and Urban Development Secretary Shaun Donovan to hash out the terms.

Nearly half of the aid will go to reducing the principal amount JPMorgan customers owe on their mortgages. The bank will also be credited $300 million for temporarily suspending the collection of mortgage payments to increase the odds that borrowers will be able to remain in their homes.

Phyllis Salowe-Kaye, head of the state's largest housing counseling agency, NJ Citizen Action, said the principal reduction was the most important part of the settlement.

"We have learned that principal write-downs are really the only way to keep people in their homes," she said. "You have so many of these homeowners who are in homes that are so far underwater." Simply reducing the interest rate isn't enough for these households, she said. They need to have their mortgage amounts reduced so they don't owe more on the loan than the property is worth.

The remaining money will be used to lower interest rates on existing loans and give low-income borrowers new mortgages, which the bank is forbidden to sell to investors and forced to keep on its books to encourage responsible lending.

Staff Writer Kathleen Lynn contributed to this article.

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