NEW YORK CITY - JPMorgan Chase will pay US$5.1 billion (S$6.3 billion) to settle charges it overstated the quality of mortgages and mortgage-backed securities sold to Freddie Mac and Fannie Mae, US officials said Friday.
The Federal Housing Finance Agency, which regulates the two government-backed financing giants, had accused the bank, and two subsidiaries, Bear Stearns and Washington Mutual, of causing "billions of dollars" in losses to the two mortgage finance companies.
The settlement resolves part of the tab as the US's biggest bank proceeds with negotiations with the government over a broader pact to resolve mortgage-related violations.
The larger (US$4.0 billion) of the two settlements relates to US$33.8 billion in residential mortgage-backed securities sold by JPMorgan to Fannie and Freddie between 2005 and 2007, according to the FHFA's 2011 complaint.
The remaining US$1.1 billion concerns claims JPMorgan made about single-family mortgages it sold Fannie and Freddie between 2000 and 2008.
JPMorgan "falsely" told Freddie and Fannie the underlying mortgages met the two agencies' standards for quality. In practice, the assets were much lower quality than claimed. Many loans that were billed as safe later defaulted or were foreclosed upon.
The FHFA said JPMorgan's conduct "constitutes negligent misrepresentation, common law fraud and aiding and abetting fraud," the FHFA complaint said.
The FHFA's litany of allegations included the charge that the bank permitted bad loans to be pooled into securities in exchange for underwriting and securitization fees.
The securities were sold to Fannie and Freddie by JPMorgan itself and also by Bear Stearns and Washington Mutual, which were acquired by JPMorgan in 2008.
FHFA Acting Director Edward J. DeMarco said the settlement "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."
"This is a significant step as the government and JPMorgan Chase move to address outstanding mortgage-related issues."
A JPMorgan statement called Friday's agreement "an important step towards a broader resolution of the firm's (mortgage-backed securities)-related matters with governmental entities."
Friday's settlement comes as negotiations continue between JPMorgan and the Justice Department over a larger pact to resolve mortgage-related violations before the housing bust.
Negotiations have centred on an agreement of around US$13 billion, with US$4 billion in consumer relief and US$5 billion in penalties, in addition to the US$4 billion announced Friday, according to a report in the Wall Street Journal.
The Justice Department negotiations also involve a number of other entities, including the state of New York, which filed its own suit against JPMorgan in October 2012, and the US Attorney from the Eastern District of California, which has launched a criminal probe into JPMorgan's conduct during this period in parallel with a civil suit.
The impending Justice Department settlement is not expected to include the California criminal case.
JPMorgan, which also faces considerable litigation from private parties over mortgage-backed securities, reported its first quarterly loss in nearly a decade earlier this month after it took a US$9.15 billion charge to boost its legal reserves.
"I wish we could reduce the uncertainty for investors, but we can't," chief executive Jamie Dimon said of the ever-inflating legal bills. Dimon has called the litigation "painful."
The bank also paid a US$920 million settlement in September to regulators to settle violations related to the US$6.2 billion "London whale" trading loss and a US$410 million to resolve charges it manipulated some US electricity markets. Ongoing investigations into both these matters continue.
The bank is not alone in the hot seat in the mortgage debacle. Nearly all the big banks continue to face major legal woes related to their conduct ahead of the housing bust.
A US jury this week ruled that Bank of America defrauded Fannie and Freddie with a lending programme that fast-tracked mortgages ahead of the housing bust. A federal judge will determine a financial penalty on the bank.
Attorney General Eric Holder has highlighted as a priority holding the banks accountable for their actions ahead of the financial crisis.