WASHINGTON - JPMorgan Chase & Co. has reached a record $13 billion settlement with federal and state authorities, resolving claims over the bank's sales of low-quality, high-risk mortgage-backed securities that collapsed in value during the U.S. housing crisis.
The agreement is the latest chapter in the bursting of the housing bubble.
"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said. "JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm's behavior."
The JPMorgan Chase & Co. logo is displayed at their headquarters in New York, in this Oct. 21, file photo. A person close to the talks says the Justice Department and JPMorgan Chase & Co. have reached agreement on all issues in a $13B settlement of a civil inquiry into the company's sales of low-quality mortgage-backed securities that collapsed in value in the financial crisis.
The settlement announced Tuesday requires JPMorgan to pay $9 billion and provide $4 billion in consumer relief, including principal reductions and other mortgage modifications for homeowners facing foreclosure.
According to a document filed as part of the settlement, JPMorgan acknowledged that it regularly represented to investors that mortgage loans in various securities complied with underwriting guidelines. Contrary to those representations, on a number of occasions JPMorgan employees knew that the securities did not comply with those underwriting guidelines, the Justice Department said.
On Monday, the Justice Department's No. 2 official said too many financial institutions had failed in their duty to ensure that their businesses were run cleanly.
Recounting the conduct common to many banks including JPMorgan, Deputy Attorney General James Cole told the American Bankers Association that too many supervisors incentivized excessive risk taking, knowing that risky products "could be unloaded down the road, ... leaving someone else to deal with the consequences."
The final issue in the settlement revolved around the $4 billion to compensate consumers. Some $1.5 billion will be a write-down to reduce the principal of homeowner loans; $300 million will enable homeowners to pay less now on their mortgages; and the remainder of the $4 billion will go toward reducing mortgage interest rates, originating new loans and helping revive blighted properties in some of the hardest hit areas of the housing crisis, such as Detroit. An independent monitor will be appointed to oversee the assistance to homeowners.
The agreement eclipses the record $4 billion levied on oil giant BP in January over the worst offshore oil spill in U.S. history.
Still to come is a decision on whether the Justice Department will file criminal charges against JPMorgan. An investigation is under way by the U.S. Attorney's office in Sacramento, Calif.
The nation's biggest bank will pay more than $6 billion to compensate investors, pay $4 billion to help struggling homeowners and pay the remainder as a fine.
JPMorgan has said most of its mortgage-backed securities came from Bear Stearns Cos. and Washington Mutual Inc., troubled companies that JPMorgan acquired in 2008.