JPMorgan Chase has agreed to pay $5.1 billion to resolve claims that it misled Fannie Mae and Freddie Mac about risky home loans and mortgage securities it sold them before the housing market collapsed.
The Federal Housing Finance Agency, which oversees Fannie and Freddie, announced the settlement Friday with JPMorgan, the largest U.S. bank. A broader deal with the Justice Department is still being negotiated.
JPMorgan sold $33 billion in mortgage securities to Fannie and Freddie between 2005 and 2007, according to the agency. That was the second-most sold to Fannie and Freddie ahead of the crisis, behind only Bank of America. The securities soured after the housing bubble burst in 2007, losing billions in value.
In a statement Friday, JPMorgan called the agreement with the FHFA "an important step towards a broader resolution of the firm's" mortgage-related matters.
Edward DeMarco, the FHFA's acting director, said the settlement with JPMorgan "provides greater certainty in the marketplace and is in line with our responsibility for preserving and conserving Fannie Mae's and Freddie Mac's assets on behalf of taxpayers."
The settlement is the start of what could be the largest penalty the government has extracted from a company for actions related to the financial crisis. The crisis, triggered by vast sales of risky mortgage securities, plunged the economy into the deepest recession since the Great Depression.
Last weekend, JPMorgan reached a tentative agreement with the Justice Department to pay $13 billion over bad loans and mortgage securities the bank sold before the crisis. The FHFA originally participated in those negotiations. It's unclear when the broader agreement will be finalized.
The FHFA sued 18 financial institutions in September 2011 over their sales of mortgage securities to Fannie and Freddie. The total price for the securities sold was $196 billion.
The government rescued Fannie and Freddie during the financial crisis when both were on the verge of collapse. The companies received taxpayer aid totaling $187 billion. They have since become profitable and repaid $146 billion.
Fannie and Freddie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new mortgages. The two companies don't directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps make loans available and exert influence over the housing market.
New York-based JPMorgan will pay about $2.74 billion to Freddie and $1.26 billion to Fannie for the securities it sold. JPMorgan is also paying $1.1 billion for home loans it sold to Fannie and Freddie ahead of the crisis. Under the terms of the settlement, JPMorgan admits no wrongdoing.
The mortgage securities that JPMorgan sold to Fannie and Freddie included billions that were packaged by two institutions that failed in 2008: Wall Street bank Bear Stearns and Seattle-based Washington Mutual, the largest U.S. savings and loan. JPMorgan bought Bear Stearns and Washington Mutual in deals brokered by the government.
A number of big banks, including JPMorgan, Goldman Sachs and Citigroup, previously have been accused of abuses in sales of securities linked to mortgages in the years leading up to the crisis. Together, they have paid hundreds of millions in penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the bonds they sold.
But no high-level Wall Street executives have been sent to jail over charges related to the financial crisis. And the banks in all the SEC cases were allowed to neither admit nor deny wrongdoing — a practice that brought criticism of the agency from judges and investor advocates. That has triggered public outrage. Some lawmakers and other critics demanded that the big bailed-out banks and senior executives be held accountable.
Until recently, JPMorgan has enjoyed a reputation for managing risk better than its Wall Street competitors. The bank came through the financial crisis in better shape than most of its rivals.
But in the past 18 months it has been engaged in a number of embarrassing and costly settlements.
In September, JPMorgan agreed to pay $920 million and admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. That combined amount, in settlements with three regulators in the U.S. and one in Britain, is one of the largest fines ever levied against a financial institution.
And in a first for a major company, JPMorgan admitted in the agreement with the SEC over the trading loss in London that it failed in its oversight.
In another case, the company agreed to pay a $100 million penalty and admitted that its traders acted "recklessly" with the London trades.