JPMorgan Said To Be Fined $13 Billion In Toxic Mortgage Bonds Sale

  • By Admin
  • October 23, 2013
  • Comments Off on JPMorgan Said To Be Fined $13 Billion In Toxic Mortgage Bonds Sale

IMG_20131021_170102JPMorgan Chase & Co, America’s largest bank by asset, is said to have reached a $13 billion deal with the Department of Justice for its role in selling toxic mortgage debt to investors prior to the 2008 financial crisis. The settlement amount is a record in U. S. history. So what did JPMorgan allegedly do that was so bad?

When we take out (technically speaking, give the bank) a mortgage to purchase a house, the bank seldom keeps the mortgage for the entire loan term (usually 15 or 30 years). Instead, the bank packages a collection of these mortgages and sells to investors in the secondary market. Fannie Mae and Freddie Mac were the two largest investors.

During the 2008 financial crisis, when real estate values plummetted and homeowners lost their jobs, they started to default on their payment obligations. Many of the mortgage bonds, often refered to as “mortgage-back securities” or MBS, became toxic assets.

Another factor contributed to the large number of default loans is improper lending procedures. Before the financial crisis, many lenders provided mortgages to homebuyers with questionable credit profiles. Many mortgages written at the time had 100% loan-to-value ratio (LTV), for a second home or an investment property rather than a primary residence, and were to borrowers who had demonstrated debatable credit worthiness. 100% LTV loans on investment homes had the highest default rate because it was relatively easy for the borrower to walk away from his obligations when the home price is underwater, or the home value falls below the loan owed.

The Federal Housing Finance Agency (FHFA), which oversaw Fannie Mae and Freddie Mac, sued JPMorgan Chase and other banks of knowingly misrepresented the quality of billions worth of toxic mortgages bonds, and sold to Fannie Fae and Freddie Mac before the financial downturn.   JPMorgan is expected to settle suit for $13 billion.

 

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