DealBook: E-Mails Show Flaws in JPMorgan's Mortgage Securities
JPMorgan routinely hired Clayton Holdings and other
third-party firms to examine home loans before they were packed into
investments. Combing through the mortgages, the firms searched for
problems like borrowers who had vastly overstated their incomes or
appraisals that inflated property values.
According to the court documents, an analysis for JPMorgan in September 2006 found that "nearly half of the sample pool" — or 214 loans — were "defective," meaning they did not meet the underwriting standards. The borrowers' incomes, the firms found, were dangerously low relative to the size of their mortgages. Another troubling report in 2006 discovered that thousands of borrowers had already fallen behind on their payments.
But JPMorgan at times dismissed the critical assessments or altered them, the documents show. Certain JPMorgan employees, including the bankers who assembled the mortgages and the due diligence managers, had the power to ignore or veto bad reviews.
In some instances, JPMorgan executives reduced the number of loans considered delinquent, the documents show. In others, the executives altered the assessments so that a smaller number of loans were considered "defective."
In a 2007 e-mail, titled "Banking overrides," a JPMorgan due diligence manager asks a banker: "How do you want to handle these loans?" At times, they whitewashed the findings, the documents indicate. In 2006, for example, a review of mortgages found that at least 1,154 loans were more than 30 days delinquent. The offering documents sent to investors showed only 25 loans as delinquent.
A person familiar with the bank's portfolios said JPMorgan had reviewed the loans separately and determined that the number of delinquent loans was far less than the outside analysis had found.
At Bear Stearns and Washington Mutual, employees also had the power to sanitize bad assessments. Employees at Bear Stearns were told that they were responsible for "purging all of the older reports" that showed flaws, "leaving only the final reports," according to the court documents.
Such actions were designed to bolster profit. In a deposition, a Washington Mutual employee said revealing loan defects would undermine the lucrative business, and that the bank would suffer "a couple-point hit in price."
Ratings agencies also did not necessarily get a complete picture of the investments, according to the court filings. An assessment of the loans in one security revealed that 24 percent of the sample was "materially defective," the filings show. After exercising override power, a JPMorgan employee sent a report in May 2006 to a ratings agency that showed only 5.3 percent of the mortgages were defective.
Such investments eventually collapsed, spreading losses across the financial system.
Dexia, which has been bailed out twice since the financial crisis, lost $774 million on mortgage-backed securities, according to court records.
Mr. Schneiderman, the New York attorney general, said that overall losses from flawed mortgage-backed securities from 2005 and 2007 were $22.5 billion.
In a statement shortly after he sued JPMorgan Chase, Mr. Schneiderman said the lawsuit was a template "for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes."
According to the court documents, an analysis for JPMorgan in September 2006 found that "nearly half of the sample pool" — or 214 loans — were "defective," meaning they did not meet the underwriting standards. The borrowers' incomes, the firms found, were dangerously low relative to the size of their mortgages. Another troubling report in 2006 discovered that thousands of borrowers had already fallen behind on their payments.
But JPMorgan at times dismissed the critical assessments or altered them, the documents show. Certain JPMorgan employees, including the bankers who assembled the mortgages and the due diligence managers, had the power to ignore or veto bad reviews.
In some instances, JPMorgan executives reduced the number of loans considered delinquent, the documents show. In others, the executives altered the assessments so that a smaller number of loans were considered "defective."
In a 2007 e-mail, titled "Banking overrides," a JPMorgan due diligence manager asks a banker: "How do you want to handle these loans?" At times, they whitewashed the findings, the documents indicate. In 2006, for example, a review of mortgages found that at least 1,154 loans were more than 30 days delinquent. The offering documents sent to investors showed only 25 loans as delinquent.
A person familiar with the bank's portfolios said JPMorgan had reviewed the loans separately and determined that the number of delinquent loans was far less than the outside analysis had found.
At Bear Stearns and Washington Mutual, employees also had the power to sanitize bad assessments. Employees at Bear Stearns were told that they were responsible for "purging all of the older reports" that showed flaws, "leaving only the final reports," according to the court documents.
Such actions were designed to bolster profit. In a deposition, a Washington Mutual employee said revealing loan defects would undermine the lucrative business, and that the bank would suffer "a couple-point hit in price."
Ratings agencies also did not necessarily get a complete picture of the investments, according to the court filings. An assessment of the loans in one security revealed that 24 percent of the sample was "materially defective," the filings show. After exercising override power, a JPMorgan employee sent a report in May 2006 to a ratings agency that showed only 5.3 percent of the mortgages were defective.
Such investments eventually collapsed, spreading losses across the financial system.
Dexia, which has been bailed out twice since the financial crisis, lost $774 million on mortgage-backed securities, according to court records.
Mr. Schneiderman, the New York attorney general, said that overall losses from flawed mortgage-backed securities from 2005 and 2007 were $22.5 billion.
In a statement shortly after he sued JPMorgan Chase, Mr. Schneiderman said the lawsuit was a template "for future actions against issuers of residential mortgage-backed securities that defrauded investors and cost millions of Americans their homes."
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