securities to Fannie and Freddie. FHFA claimed that JPMorgan fraudulently misrepresented the credit quality of the mortgage loans underlying the securities, making them look less risky to investors.The alleged fraudulent reporting centered on two important mortgage characteristics: occupancy status and theloan-to-value (LTV) ratio. Owner-occupants are less likely to default on their mortgages than second-homebuyers and investors. Also, the lower the LTV ratio, the less likely it is that the borrower will default.Bloomberg Government's evaluation of data in the FHFA filings reveals that for the 103 securities that Fanniebought between 2005 and 2008, JPMorgan claimed that an average of 16 percent of the underlying mortgageswere for investor or second homes. In reality, 25 percent of the securities were backed by loans that were notrelated to a primary residence.JPMorgan also stated that, on average, just 38 percent of the mortgages had loan-to-value ratios exceeding 80percent, and that there were no mortgages in its pool that had a LTV ratio of 100 percent or more. Regulatorsestimated that the true LTV average for mortgages sold to Fannie and Freddie was closer to 60 percent, andfound that 18 percent of the securities JPMorgan sold to Fannie and Freddie had zero or negative equity.
Implications of the Settlement
The first chart shows that JPMorgan was not alone in misrepresenting the quality of its securities. BloombergGovernment calculated the average underwriting characteristics of disputed mortgage securities for the 10largest banks that are still operating independently since the financial crisis. The analysis reveals that thesebanks also appear to have consistently inflated the percentage of owner-occupied mortgage loans andlowballed the percentage of mortgages with high LTVs.The Royal Bank of Scotland Group Plc, for example, sold Fannie and Freddie almost the same amount of disputed mortgages as JPMorgan, around $30 billion. Deutsche Bank AG, Credit Suisse Group AG andGoldman Sachs Group Inc. also sold a large amount of securities to Fannie and Freddie that FHFA
omitted key details about or mischaracterized the underlying mortgages.Bloomberg Government used JPMorgan's settlement with FHFA to estimate the liabilities that other large banksface in similar suits. JPMorgan's $5.1 billion settlement, for example, represents 15 percent of the $33 billion indisputed mortgage securities cited in the FHFA's lawsuit.Because the other large banks displayed reporting patterns similar to those in the JPMorgan case, it's likely thattheir settlements will be similar. Using the JPMorgan settlement ratio of 15 percent as a benchmark to estimatethe ultimate liabilities in these cases, the combined settlement estimate for the other nine banks comes to $23billion.Bank of America Corp. has the highest exposure of the banks analyzed because it's also liable for suits filed byFHFA against Countrywide Financial Corp. and Merrill Lynch & Co., bringing its total litigation exposure to $57billion. According to BGOV estimates, Bank of America faces $8.8 billion in settlements.
Page 2 of 3JPMorgan Settlement Implies Billions for Others: BGOV Insight, Banking Report (BNA)...11/8/2013http://www.bloomberglaw.com/document/XB0ARSH8000000?campaign=bnaemaillink&i...