JP Morgan Chase & Co. admitted it regularly overstated the quality of mortgages it sold to investors and agreed to pay a record $13 billion to resolve related charges, federal officials said on Tuesday.
The civil settlement would mark the end of weeks of tense negotiations between JPMorgan Chase, the largest U.S. bank, and government agencies that are under pressure to hold banks accountable for wrongdoing that led to the housing crisis.
For JP Morgan, the deal resolves some of the welter of investigations it is dealing with now. But even after the settlement, the bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate.
JP Morgan said last month that it has set aside $23 billion to cover litigation expenses. Its share rose 0.9 percent to $56.22.
For this settlement, JPMorgan took the unusual step of acknowledging that its employees knowingly sold loans to investors that were shakier than the bank claimed.
Due diligence firms that reviewed those loans for JP Morgan in 2006 and 2007 deemed that 27 percent of them were failing, but the bank still packaged at least half of those into mortgage securities, the government said.
The government called the settlement the largest in U.S. history, but the deal is really several rolled into one. It includes a $4 billion relief package with U.S. Department of Housing and Urban Development, and a $4 billion settlement with the Federal Housing Finance Agency, which oversees government mortgage financing companies Fannie Mae and Freddie Mac.
JP Morgan and government agencies led by the Justice Department reached a tentative agreement in mid-October and have been hammering out details since then. New York Attorney General Eric Schneiderman was also involved in discussions.
Of the $4 billion settlement with HUD, at least $1.5 billion will go toward loans the bank is forgiving. As much as $500 million will go to change the terms of loans to lower monthly payments.
The remaining $2 billion will be for assorted purposes, including new loans for low- and moderate-income borrowers in areas that have been hard-hit by the housing crisis and for demolition of abandoned homes, a source said.
JP Morgan's negotiations with the Justice Department began in earnest last spring, after Justice Department lawyers in California preliminarily concluded that the bank had violated U.S. civil laws. The Justice Department had looked into mortgage bonds the bank sold from 2005 through 2007, the company said in August.
Government lawyers had prepared to file a lawsuit against JP Morgan in September and scheduled a news conference to announce it. But they canceled it at the last minute as JP Morgan reached out to government officials to discuss a settlement. JP Morgan Chief Executive Jamie Dimon met U.S. Attorney General Eric Holder later that month to talk about a deal on mortgage probes.