JPMorgan Chase & Co said it routinely overstated the quality of mortgages it was selling to investors, and it agreed to pay $13 billion to settle related charges with the U.S. government, federal officials said on Tuesday.
The behavior that the largest US bank admitted to, authorities said, is at the heart of what inflated the housing bubble: lenders making bad mortgages and selling them to investors who thought they were safe. When the loans started turning bad, investors lost faith in the banking system, and a housing crisis turned into a financial crisis.
The civil settlement marks the end of weeks of tense negotiations between JPMorgan Chase, which is looking to move past the legal issues that have plagued it for more than a year, and the U.S. government, which is under pressure to hold banks accountable for behavior that led to the financial crisis.
JPMorgan said it has set aside all the funds it needs to cover the settlement, meaning the deal will have no impact on its earnings. The deal resolves most of its mortgage issues with federal authorities, the bank said. JPMorgan's shares rose 0.7 percent to close at $56.15 on Tuesday.
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. It may still also face criminal charges linked to mortgage matters. The bank said last month it had set aside $23 billion to cover litigation expenses.
At issue in Tuesday's settlement was the long chain of parties between the original mortgage lender and the ultimate investor in the loan. Often smaller lenders would make a mortgage loan, and sell it to a bank, which would package loans into bonds, and in turn sell them to investors. This chain allowed capital to flow to loans that arguably should never have been made.
"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," said U.S. Attorney General Eric Holder in a statement.
The investors that bought these mortgage bonds demanded that the loans be of a particular quality. JPMorgan said the loans met the guidelines, but one of its employees said they did not, the bank admitted.
Due diligence firms that reviewed some of those loans for JPMorgan in 2006 and 2007 said that 27 percent of them did not meet underwriting guidelines, but the bank