J.P. Morgan’s $13B Residential Mortgage-Backed Securities Deal with the DOJ Stumbles Into Obstacles

Reuters is reporting that according to a source in the know, J.P. Morgan Chase & Co.’s (JPM) tentative $13 billion residential mortgage-backed securities settlement with the US Justice Department has hit a couple of stumbling blocks. The firm is reportedly trying to include a provision that would close any criminal probes into its packaging and sale of mortgage securities—except for an inquiry by California prosecutors. This counters the bank’s earlier decision to agree to keep criminal investigations out of the deal.

The settlement, preliminarily reached last week, includes $4 billion to resolve claims made by the Federal Housing Finance Agency, which contends that J.P. Morgan misled Freddie Mac (FMCC) and Fannie Mae (FNMA) about the quality of loans the latter two bought from the investment bank before the 2008 economic crisis. Another $4 billion is for consumer relief, while $5 billion is for penalties.

The agreement also would settle a separate mortgage securities lawsuit filed separately by NY AG Eric Schneiderman against the firm over Bear Stearns (BSC)-packaged mortgage bonds. The state’s top prosecutor contended that Bear Stearns misled investors about the faulty loans behind the securities, neglected to complete assess the debt, disregarded defects that were found, and concealed its failure to properly examine the loans or reveal their risks.

The deal isn’t final and certain matters still need to be resolved, such as the disagreement with the Federal Deposit Insurance Corp. over who should be responsible for legal liabilities stemming from the bank’s takeover of Washington Mutual’s (WAMUQ) obligations and assets during the economic collapse. JPMorgan paid $1.9 billion to acquire that bank from FDIC. However, the firm is disputing its degree of responsibility for investor losses on the failed savings holding company’s mortgage securities. The DOJ wants a provision that will stop the bank from attempting to move WaMu liabilities covered under the agreement to the FDIC.

Other Recent JPMorgan Settlements
Also last week, JPMorgan consented to pay $100 million to the Commodity Futures Trading Commission over its “London whale” trades debacle. The CFTC accused the bank’s London traders of employing a reckless derivatives strategy that cost JPMorgan $6.2 billion in losses. While the firm didn’t deny or admit to the agency’s finding that there was a violation, it did agree about “certain facts.” For one, J.P. Morgan admitted that it did not properly supervise the traders who tweaked prices to lower the bank’s losses at cost to investors.

That settlement comes a month after the firm said it would pay $920 million over related charges to the Securities and Exchange Commission, the Federal Reserve, Office of the Comptroller of the Currency in the US and the Financial Conduct Authority in the UK.

Please contact our RMBS fraud lawyers if you think you might have grounds for a mortgage-backed securities case.

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The Resolution Law Group: SEC Wants Comments About FINRA’s Proposed Rules About Broker-Dealer Supervision

The Securities and Exchange Commission wants comments on a proposed amendment to the Financial Industry Regulatory Authority’s broker-deal supervision rules. The latter wants to change the rules by consolidating some of them, including NASD Rule 3010 and NASD Rule 3012 into its proposed Rules 3110 and 3120 that have to do with supervisory controls and the supervision of supervisory jurisdictions’ office and branch offices. The proposed rule change would eliminate NYSE Rule 342, which is related to supervision, approval, and controls, Rule 401 about business conduct, and Rule 354 regarding control persons, Rule 351e about reporting requirements. The consolidation is taking place because the SEC says some of the rules are duplicative.

FINRA also wants to eliminate proposed Rule 3110.03, which is a provision about the supervision and control of registered principals at one-person OSJs by a designated senior principal on the site. The SRO also is proposing to amend rule 3110.05 so that an Investment Banking and Securities Business member doesn’t have to perform detailed reviews of transaction if the member is using risk-based review system that is designed in a way so it can focus on areas that have the greatest risks of violation.

Meantime, proposed Rule 3110(b)(6)(D) will be changed so that it is clear that the rule doesn’t establish a strict liability to identify and get rid of all conflicts as they relate to an associated person that is supervised by supervisory personnel. There will have to be procedures to make sure that conflicts of interest don’t compromise the supervisory system.

As for proposed rule 3110(c)(3)(A), this will be modified so it is clear that it doesn’t establish a strict liability duty mandating the ID’ing and getting rid of all conflicts of interest as they relate to the inspections taking place at a location. Members will have to implement procedures designed so that they don’t let the effectiveness of inspections become compromised by such conflicts.

The Resolution law Group represents investors that have sustained financial losses because of broker fraud. Contact our securities law firm today.

The Resolution Law Group: US Supreme Court Hears Oral Argument on the Impact of SLUSA on the Stanford Ponzi Scams

The US Supreme Court has just listened to oral argument about how the Fifth Circuit appeals court interprets the breadth of the Securities Litigation Uniform Standards Act’s (SLUSA), which precludes the majority of state class action cases involving plaintiffs claiming misrepresentations related to the buying or selling of a security that it covers. The case stems from Allen Stanford’s $7B Ponzi scam, in which one of his banks put out certificates of deposit that were supposedly safe, liquid investments when, in reality, the investments did not exist. The bank used money from new CD sales to issue redemption payments and interest on older CDs.

Following the discovery of the Stanford securities shame, two sets of investors filed securities fraud cases in Louisiana court against several Stanford companies and employees contending law had been violated. The defendants got the cases sent to federal court.

The securities lawsuits were then sent to the Northern District of Texas, which threw out the fraud lawsuits on the grounds that SLUSA precluded them. That court said that the CDs weren’t covered but that the investors had alleged misrepresentations having to do with securities that were covered. The Stanford bank had claimed it invested in securities that were issued by multinational companies and solid governments and led investors to think investments SLUSA-covered securities at least partially backed the CDs. he Fifth Circuit then reversed that decision.

Now, the US Supreme Court must determine whether the class action securities cases can move forward despite SLUSA preclusion of “covered class actions” involving a private party claiming there has been a misrepresentation/omission of a material fact related to the selling or buying of a covered security.

Our Ponzi fraud lawyers represent clients that have suffered losses from Ponzi scams and other financial schemes, including elder financial fraud, affinity schemes, pump-and-dump scams, and others. Shepherd Smith Edwards and Kantas, LTD LLP represents institutional and individual investors.

The Resolution Law Group: JPMorgan Said to Reach Record $13 Billion U.S. Settlement

JPMorgan Chase & Co.’s record $13 billion deal to end U.S. probes of its mortgage-bond sales would free the nation’s largest bank from mounting civil disputes with the government while leaving a criminal inquiry unresolved.

The tentative pact with the Department of Justice increased from an $11 billion proposal last month and would mark the largest amount paid by a financial firm in a settlement with the U.S. The deal wouldn’t release the bank from potential criminal liability, at the insistence of U.S. Attorney General Eric Holder, according to terms described by a person familiar with the talks, who asked not to be named because they were private.

“To not get the waiver from criminal prosecution is not good,” said Nancy Bush, a bank analyst who founded NAB Research LLC in New Jersey. “What we’re looking for in a settlement of this size is certainty from things like the criminal prosecution of a company. The Street wants certainty.”

JPMorgan Chief Executive Officer Jamie Dimon, 57, personally discussed the deal with Holder after markets closed Oct. 18 as the banker sought to end probes that have beset his firm and resulted in its first quarterly loss under his watch. The agreement, which isn’t yet final, includes $4 billion in relief for unspecified consumers and $9 billion in payments and fines, according to another person briefed on the terms.

The payouts would cover a $4 billion accord with the Federal Housing Finance Agency over the bank’s sale of mortgage-backed securities, that person said. The deal, which may be announced in the coming week, also resolves pending inquiries by New York Attorney General Eric Schneiderman, the people said.

Dwarfing Pay

The settlement would amount to more than half of JPMorgan’s record $21.3 billion profit last year, or 1.5 times what the firm’s corporate and investment bank set aside to pay employees during this year’s first nine months. Only seven companies in the Dow Jones Industrial Average earned more than $13 billion in 2012, according to data compiled by Bloomberg. Some portions of the deal, such as relief to homeowners, would probably be tax deductible for JPMorgan.

The outline of the tentative accord was reached during a telephone call between Holder, Dimon, JPMorgan General Counsel Stephen Cutler and Associate U.S. Attorney General Tony West, said the person. The settlement’s statement of facts is still being negotiated.

Bondholder Concerns

Holder told Dimon that a release from the criminal inquiry wouldn’t be forthcoming as part of any deal, said the person familiar with their talks. The accord will probably require JPMorgan to cooperate in criminal investigations of individuals tied to wrongdoing associated with the bank’s mortgage practices, said the person.

Brian Fallon, a spokesman for the Justice Department, and Matt Mittenthal, a spokesman for Schneiderman, declined to comment.

The possible inclusion of homeowner relief has revived concerns among mortgage-bond investors that efforts to ease the financial burdens of millions of Americans may lower the value of instruments held by Wall Street money managers.

The Association of Mortgage Investors, representing mutual funds and pensions, urged Holder in an Oct. 7 letter not to let banks saddle them with costs associated with relief for mortgage borrowers. Banks settling claims of underwriting lapses often service debts in bonds held by others, who can wind up bearing the burden of breaks granted to homeowners.

Talks Intensify

JPMorgan’s push to settle the mortgage probes and other cases required a $7.2 billion charge in the third quarter, causing the bank to report a $380 million loss on Oct. 11. The firm has tapped $8 billion of $28 billion in reserves set aside since 2010 to cover its legal expenses.

Those costs follow three years of record profits that have driven the stock higher. JPMorgan’s shares have climbed 72 percent since the end of 2008, compared with a 48 percent gain in the KBW Bank Index of 24 U.S. firms. On the day the firm reported its quarterly loss, the stock closed little changed. It has since climbed 3.4 percent.

“It looks like they are gradually becoming able to put the past and the crisis behind them,” said Craig Pirrong, professor of finance at the University of Houston’s Bauer College of Business whose research includes risk management. “It’s an expensive history lesson, and they are not out of the woods yet.”

JPMorgan’s push to end the mortgage probes intensified last month after the U.S. Attorney’s office in Sacramento, California, told the bank it was preparing to bring a case. Authorities there already had concluded there were civil violations and opened a criminal probe, JPMorgan said in an August regulatory filing.

Government’s Stance

Dimon spent two hours at the Justice Department in Washington on Sept. 26 to discuss a possible settlement of state and federal probes with Holder, a person familiar with the matter said at the time. During the bank’s talks with senior Justice Department officials, proposals swung by billions of dollars, people with knowledge of the situation said. At one point, officials rejected the company’s offer to pay $3 billion to $4 billion, one person said at the time.

“It almost sounds like a negotiation where the government just kept saying, ‘No. No. No,’ until JPMorgan met their number,” said Peter Henning, a former federal prosecutor and Securities and Exchange Commission attorney who teaches law at Wayne State University in Detroit.

Others involved in the talks of a global deal included the Department of Housing and Urban Development and Schneiderman, who is co-chairman of a federal and state working group on residential mortgage-backed securities, which negotiated the civil-mortgage settlement with JPMorgan.

False Statements

The FHFA sued JPMorgan and 17 other banks over faulty mortgage bonds two years ago to recoup some of the losses taxpayers were forced to cover when the government took control of failing mortgage finance companies in 2008.

The FHFA accused JPMorgan and its affiliates of making false statements and omitting material facts in selling $33 billion in mortgage bonds to Fannie Mae and Freddie Mac from Sept. 7, 2005, through Sept. 19, 2007. Those two firms, regulated by FHFA, have taken $187.5 billion in federal aid since then.

The regulator said executives at JPMorgan, Washington Mutual and Bear Stearns Cos., which were acquired by JPMorgan in 2008, knowingly misrepresented the quality of the loans underlying the bonds, according to the lawsuit filed in federal court in Manhattan.

Dimon said in a speech last year that he did the U.S. a favor by buying Bear Stearns and that he might not go through with it again because of how much the deal ultimately cost.

Settlement ‘Chagrin’

“The settlement probably comes with a sense of chagrin at JPMorgan,” said Joseph Grundfest, a former SEC commissioner who’s now a professor of business and law at Stanford University Law School. “Many of the problematic transactions were done by banks that JPMorgan acquired during the financial crisis at the behest of the U.S. government — not by JPMorgan itself.”

UBS AG, Switzerland’s largest bank, agreed to pay $885 million last month to settle claims it misrepresented the quality of the loans backing $4.5 billion in residential mortgage bonds it sponsored and $1.8 billion of third-party mortgage bonds sold to Fannie Mae and Freddie Mac. UBS was the third bank to reach an agreement with FHFA.

Citigroup Inc. and General Electric Co. both paid undisclosed amounts to settle the regulator’s claims.

Probes Pending

JPMorgan has paid more than $1 billion to five different regulators in the past month to settle probes into botched derivatives trades that lost more than $6.2 billion in 2012. It also settled unrelated claims it unfairly charged customers for credit-monitoring products.

The bank faces an investigation into its hiring practices in Asia. It’s also the subject of a probe by Manhattan U.S. Attorney Preet Bharara into claims it abetted Bernard Madoff’s Ponzi scheme, a person familiar with that matter said.

The six biggest U.S. banks, led by JPMorgan and Charlotte, North Carolina-based Bank of America Corp., have piled up more than $100 billion in legal costs since the financial crisis, a figure that exceeds all of the dividends paid to shareholders in the past five years, Bloomberg data show.

The Obama administration set up the residential mortgage-backed securities working group in 2012 to coordinate a crackdown on deceptive underwriting practices that contributed to the financial crisis.

Schneiderman’s Claims

Schneiderman’s office sued JPMorgan last October over mortgage-bonds packaged by Bear Stearns.

Schneiderman alleged Bear Stearns misled mortgage-bond investors about defective loans backing the securities. The firm failed to fully evaluate the debt, ignored defects uncovered by a limited review and hid that it failed to adequately scrutinize the loans or disclose their risks, according to the complaint.

At the time it was filed, the cumulative realized losses on more than 100 subprime and Alt-A securities that the bank and its affiliates sponsored and underwrote in 2006 and 2007 totaled about $22.5 billion, or about 26 percent of the original balance of about $87 billion, according to the complaint. Alt-A is a term for mortgages that typically didn’t require documentation such as proof of income.

Schneiderman’s office asserted claims under New York’s Martin Act, an almost century-old law that gives the state’s attorney general broad powers to target financial fraud. The bank denied the claims in the case, which is pending in state Supreme Court in Manhattan.

‘Self-Inflicted’

The FHFA alleged in its 2011 lawsuit that the bank misled Fannie Mae and Freddie Mac about the soundness of loans in billions of dollars of residential mortgage-backed securities. The bank didn’t disclose that a significant portion of the loans failed to adhere to underwriting standards and had poor credit quality, according to the complaint.

The number of loans for owner-occupied properties was lower than investors were told, and the bank’s disclosures misrepresented the properties’ value, according to the complaint.

JPMorgan’s rising legal and regulatory penalties don’t mean the company’s bankers are “immoral,” Dimon told an audience Oct. 12 at a meeting hosted by Institute of International Finance, where he acknowledged the bank was working through a series of problems.

“Some are self-inflicted, which we’ve completely confessed to the whole world. Some are obviously industrywide,” he said. “And yes, we’ve had some mistakes. But honestly, you can never expect to have no mistakes. So, we’ve had more than our share.”

The case is Federal Housing Finance Agency v. JPMorgan Chase & Co., 11-06188, U.S. District Court Southern District of New York (Manhattan).

 

If you feel you are the victim of Mortgage Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

The Resolution Law Group: New California Appellate case published on August 8, 2013, “Glaski v. Bank of America”, holds that a homeowner can challenge his lender’s right to foreclose by showing that the Deed of Trust never made it into the securitized trust until after the trust’s closing date.

A new California Appellate case published on August 8, 2013, “Glaski v. Bank of America”, holds that a homeowner can challenge his lender’s right to foreclose by showing that the Deed of Trust never made it into the securitized trust until after the trust’s closing date. This is the case in most loans made in the last 12 years. If the bank foreclosed we should be able to get the homeowner money damages and/or the house back. Or a lawsuit could be filed and a court ruling obtained preventing the court from foreclosing.Recently enacted Sections 2924(a)(6) and 2924.19 of California Civil Code provide the same relief to homeowners.

It is highly suggested that homeowners take this window of opportunity to get relief before the banks get Congress to close this door with national legislation.  If you feel you are the victim of Mortgage Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

 

The Resolution Law Group: Latest Mortgage Fraud Trend: Collusion on the Inside

victor wolf mortgage fraud case

When real estate agent John Lebron opened EZ Investments in Tampa, Fla., he may have already been planning fraud. His very first EZ Investments transaction involved selling a distressed property to his sister, then to his brother-in-law, the kind of “non-arms-length” flopping that tips authorities to collusion. Lebron lost his real estate license and his liberty in April, when he was sentenced to 26 years in prison for a string of foreclosure and short-sale frauds.

Mortgage fraud is rampant in the U.S., with distressed homeowners offering a whole new market to criminals. The recent trend in rising foreclosures led to soaring rates of foreclosure fraud. The Financial Crimes Enforcement Network, or FinCen, reports a 58 percent rise in 2012’s foreclosure-rescue fraud schemes, a rate possibly spurred by the “opportunity” created by government assistance programs.

Florida continues its run as the country’s top state for mortgage fraud investigations, coming in No. 1 on the Lexis-Nexis Mortgage Fraud Index for the fifth year. With a Mortgage Fraud Index of 805, Florida had eight times the expected number of fraud investigations in 2012. It’s closest second, Nevada, had only a little over 2½ times the expected rate. Plus, for the second year running, Florida came in first with the record number of defaults.

A newcomer to the Mortgage Fraud Top 10 also bears close watching: Ohio. Of mortgage frauds under investigation that originated only in 2012, Ohio ranks number one-indicating a recent fraud upswing in that state.

The last several years have also seen an uptick in collusion of industry professionals, resulting in an entire new index focused on collusion indicators alone. Collusion indicators, which are derived from public records, are based on factors like cohabitation, shared assets, family and business connections and other criteria, particularly relevant when a property has been transferred at a loss. Vermont ranks No. 1 in collusion indicators, with almost five times the expected number of incidents for 2012.

While FinCEN reports a 25 percent decline in Suspicious Activity Reports, or SARs, filed nationally in 2012, some analysts think the decline may be due, at least in part, to an overall decline in the housing market. According to National Association of Realtors spokesman Walter Molony, 2013 will see an estimated 11 percent increase in the housing market, creating all kinds of new opportunity for scammers.

Mortgage fraud is especially tricky, according the FBI, because scams morph with the market, always adapting to the latest trends. And although financial institutions file SARs by the thousands every month (there were 93,508 in FY 2011), it can take years after the fraud occurs before it is even discovered.
There are over a dozen common mortgage fraud schemes-application falsification, illegal flipping and flopping, short sales, equity skimming and more. The FBI and CoreLogic report that in 2010 more than $10 billion in loans originated with fraudulent application data, the most common kind of mortgage crime. Particularly brilliant hucksters manage to combine and pull off serial land and mortgage frauds that can bilk private investors and financial institutions alike out of millions. Two such alleged fraudsters were a couple living in Florida, Natalia and Victor Wolf. (CNBC’s “American Greed: The Fugitives” reports on the notorious “developers” who vanished after their investors lost millions. Victor Wolf is pictured above.)

At the end of the housing boom, the Wolfs allegedly were engaged in every known type of mortgage fraud, said Roman Groysman, an attorney representing lenders in a lawsuit against the couple. “If one could teach a course on complex mortgage fraud and match it up against the allegations against these two individuals, I think there’d be little left to cover,” he said.

“None of the lenders knew … there were other lenders,” FBI Special Agent Kurt McKenzie told CNBC. As authorities and investors began to close in on the Wolfs, the couple managed to quickly mortgage their opulent home-over and over again. There were private cash lenders, small business lenders and financial institution lenders. “By the time all was said and done,” said McKenzie, “there were at least four to five loans, mortgage loans, on [the Wolfs’] house.”

But when authorities went to the mansion looking for the couple, they found empty champagne bottles. The people who lost money by trusting the Wolfs have never been able to confront them. Unconfirmed reports place the couple at large in Moscow.

Upcoming changes to regulations may — or may not — affect rates of mortgage fraud. In January 2014, the Consumer Financial Protection Bureau will enforce new mortgage regulations that emphasize loan and borrower quality. “Under the new regulations for Qualified Mortgages,” said CFPB spokesman Samuel Gilford, “certain loan features are not allowed any more, for example, balloon payments or interest-only loans or mortgages that last for over 30 years.” The new Ability-to-Pay rule says borrowers must conform to a clear standard, and lenders will have to verify and document the lender’s ability to repay. The no-doc loans of the past, says Gilford, “were much more vulnerable to fraud.”

The latest fraud-detection tools are two new indexes in the Lexis-Nexis Annual Mortgage Fraud Report, which is available for public access: a foreclosure index, added this year, and an index of potential collusion activity, which makes its second appearance this year. The two new indexes join the on-going index of verified mortgage fraud and misrepresentation.

The potential for collusion is an important new index because in recent years, data analysis shows an increase in collusion involving multiple industry professionals. (The Collusion Indicator Index reports on the factors that make collusion possible or likely; not actual collusion.) “What the industry has found,” Jennifer Butts, one author of the Lexis-Nexis report, wrote in a recent email to CNBC, “is that these indicators-properties transferred at a loss between known relatives or associates-is often an indicator of suspicious activity.”

The more indexes a state appears on, according to the report’s authors, the more “challenging” are the state’s financial prospects for the coming years. New Jersey is the only state to appear on all three indexes. Five states — Florida, Nevada, Illinois, Georgia and Ohio-appear on both the Mortgage Fraud Index and the Volume of Foreclosures Index. And New York and Delaware appeared on both the Mortgage Fraud Index and the Collusion Indicator Index.

Drilling down into the data reveals even more geographic information: For loans originating only in 2012, five “metropolitan statistical areas” represent 35 percent of all 2012 SARs.

If you feel you are the victim of Mortgage Fraud, please do not hesitate to email or call the The Resolution Law Group (203) 542-7275 for a confidential, no obligation consultation.

The Resolution Law Group: JP Morgan Chase admitted that it broke the law in the “London Whale” trading debacle. While it is commonplace for banks to settle cases and pay money, it is uncommon for a Wall Street Bank to admit guilt.

JP Morgan Chase admitted that it broke the law in the “London Whale” trading debacle. While it is commonplace for banks to settle cases and pay money, it is uncommon for a Wall Street Bank to admit guilt.

The “Whale” losses stemmed from wrong-way bets made by JP Morgan’s London office involving complex derivatives. JP Morgan Chase agreed to pay $920 Million in addition to admitting guilt.

Geoffrey Broderick, the senior partner of the Resolution Law Group, says “While the admission of guilt is unprecedented, it is also appropriate. However, the admission was done at the corporate level. The behavior and culture on Wall Street must change, and that will only happen when CEOs and other senior executives are personally charged and held responsible.“

Mr. Broderick adds that “The housing market will continue to suffer until it is fixed by the Courts or the Legislature. Somebody has to fix the problem. That is why The Resolution Law Group continues its fight for homeowners. Homeowners cannot expect the problem to fix itself.”

The Resolution Law Group continues to prosecute ground breaking litigation in Federal Court on behalf of homeowners suing lenders and servicers for, among other things, the illegal use of MERS, robo-signing, and intentionally ignoring underwriting standards and encouraging inflated appraisals.

The Resolution Law Group is currently enrolling clients into the pending lawsuit. For further information, visit its website at www.TheResolutionLawGroup.com.