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Don’t Believe The Hype: JP Morgan’s Mortgage Settlement Isn’t As Big As It Seems

By Alan Pyke on November 20, 2013 at 10:52 am

"Don’t Believe The Hype: JP Morgan’s Mortgage Settlement Isn’t As Big As It Seems"

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JPmorganchase 3x2The government’s long-awaited settlement with JP Morgan Chase (JPM) over the bank’s mortgage business abuses is now official, and the details announced by the Department of Justice (DOJ) on Tuesday confirm many critics’ fears that the deal is weaker than the top line figure suggests. Between tax deductions and consumer relief provisions that benefit the bank, the deal will actually cost far less than the $13 billion figure touted in Tuesday’s DOJ press release.

Nearly a third of the $13 billion was actually finalized at the end of October and comes in the form of a $4 billion payment to the Federal Housing Finance Administration (FHFA). The FHFA deal is tax deductible, as is all but $2 billion of the remaining $9 billion in new settlement costs. That will save the bank $2.66 billion on the new deal, according to calculations by Salon’s David Dayen, and $1.5 billion on the older deal. This means that after taxes, it will cost JPM less than $9 billion.

Even that figure overstates the size of the bite the government is taking out of the megabank. The deal includes requirements that JPM conduct consumer relief actions that total $4 billion in value. Half of the relief will go to mortgage refinancing that gives borrowers lowered interest rates or longer repayment schedules. The bank must provide $300 million worth of “forbearance” — delayed mortgage payments, but not forgiven or canceled ones — and conduct about $200 million worth of anti-blight work such as destroying vacant homes to protect neighboring property values. The bank also has to conduct $1.5 billion in principal reduction, with $1.2 billion going to truly underwater borrowers, and depending how that money is divvied up among the country’s 7 million underwater borrowers, it could make a real difference for those who receive it. (Although unless Congress acts, that principal reduction will get taxed as income for borrowers beginning next year, which will dilute the help they receive.)

Yet these aren’t cash outlays to wronged investors, but rather actions targeted at helping struggling homeowners. And all of these actions are already in the bank’s best interest because they keep borrowers from defaulting. Nearly a third of the bank’s penalty, therefore, will come in the form of actions that ensure it gets paid either directly by borrowers or indirectly by protecting the sale value of loans it holds for mortgage-backed securities purposes.

There are two potential bright spots in the deal. For one, the bank has reportedly promised to stop trying to shift some of the settlement burden onto the Federal Deposit Insurance Corporation, even though its deal with FHFA left the door open to that tactic. Second, the press releases promise that JPM admits to misrepresenting the quality of the mortgage-backed securities it was selling and doesn’t get indemnity from civil suits with this deal. While that implies that the settlement will help investors and homeowners win judgments against the bank, Bloomberg’s Jonathan Weil notes that the actual admissions from JPM fall far short of the level of guilt claimed in government press releases. Still, any admission of wrongdoing represents a break with the past several years of financial settlements that have almost always allowed firms to pay to settle claims without either admitting or denying the underlying charges.

It’s important to remember the sheer size of the misconduct Tuesday’s announcement is meant to punish and resolve. The penalties the bank is paying are tiny compared to the size of the misconduct they are meant to resolve. The bank conducted more than a trillion dollars in its mortgage securities business from 2004 to 2007, including the mortgage activities of two banks it acquired. Those acquisitions made JPM billions of dollars in profits in the ensuing years.

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