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JPMorgan Chase & Co.’s (JPM – Analyst Report) efforts to resolve mortgage-related issues have received a fresh boost. The bank has announced a settlement deal with nearly 21 institutional investors. The company will pay $4.5 billion to investors who incurred losses on 330 residential mortgage-backed securities (RMBS) trusts issued by JPMorgan and Bears Stearns Cos.
Additionally, these RMBS were sold to the investors during 2005–2008. However, the compensation does not pertain to RMBS sold by Washington Mutual. Both Bears Stearns and Washington Mutual were acquired by JPMorgan in 2008.
The major institutional investors include BlackRock, Inc. (BLK – Analyst Report), MetLife, Inc., Pacific Investment Management Company, LLC, The Goldman Sachs Group, Inc. (GS – Analyst Report), Fannie Mae, Freddie Mac, Deutsche Bank AG, U.S. Bancorp, The TCW Group and Wilmington Trust Co.
According to the agreement, the investors have time until Jan 15, 2014 to agree to the deal, which can further be extended to Mar 15. Notably, the settlement awaits the approval of the court.
JPMorgan has now become the third financial firm to agree to a settlement deal with institutional investors over the sale of risky RMBS preceding the financial crisis. Earlier in 2012, Residential Capital – the former mortgage lending division of Ally Financial – agreed to pay $7.3 billion to investors. Similarly, in 2011, Bank of America Corp. (BAC – Analyst Report) declared an $8.5 billion settlement deal with 22 institutional investors, which is now awaiting court approval.
In the past few months, JPMorgan has settled various charges relating to the sale of home loans and MBS, its ‘London Whale’ debacle and alleged manipulation of electricity prices in California and the Midwest region, among others. However, the company still faces several lawsuits concerning the sale of risky MBS.
Hence, JPMorgan increased its litigation reserves by $9 billion to nearly $23 billion at the end of the third quarter. Additionally, the bank anticipates legal losses (over and above its existing litigation reserves) of about $5.7 billion as of Sep 30, 2013.
At present, JPMorgan carries a Zacks Rank #3 (Hold).