JPMorgan Chase has reached a $4.5 billion deal to settle claims by 21 institutional investors, agreeing to repurchase faulty residential mortgage-backed securities.
The investors, which include Black Rock Financial Management, Goldman Sachs Asset Management and the Prudential Insurance Co. of America, alleged that some of the mortgages included in the pools did not meet underwriting standards.
The claims stem from the representations and warranties of the securities, in which the bank agreed to buy back the loans if they didn't meet the standards described. The deal also includes claims related to mortgage servicing.
"This settlement is another important step in J.P. Morgan's efforts to resolve legacy related [residential mortgage-backed securities] matters," the bank said in a news release. "The firm believes it is appropriately reserved for this and any remaining RMBS litigation matters."
Houston-based Gibbs & Bruns was lead counsel for the investors. Its fees will be in addition to the settlement amount, according to the firm. The 32-lawyer firm also represented investors in an $8.5 billion settlement with Bank of America and Countrywide in 2011, a deal which also includes $85 million in legal fees. (Approval of the settlement is pending.)
Lawyers who worked on the JPMorgan deal include Kathy Patrick (dubbed "The Woman Wall Street Fears Most" by Forbes), Scott Humphries, Robert Madden and David Sheeren, according to the firm's news release.
The trustees of 330 mortgage backed securities issued by JPMorgan have until Jan. 15 to accept the settlement offer. The investors "support the agreement and have asked the Trustees to accept it," according to Gibbs & Bruns.
The $4.5 billion settlement is not part of a larger dealt that the bank is negotiating with the government. On Oct. 25, JPMorgan resolved some claims, agreeing to pay Fannie Mae and Freddie Mac $5.1 billion for similar repurchase obligations.
The payment to the institutional investors does not cover mortgage-backed securities that originated with Washington Mutual. In separate litigation with Deutsche Bank, JPMorgan argues that liability for Washington Mutual's securities belongs to the Federal Deposit Insurance Corp., which acted as the failed bank's receiver before it was purchased by JPMorgan in 2008.
The deal also does not cover "any direct individual claims for securities fraud or other alleged disclosure violations," according to Gibbs & Bruns.
In dividing the payment, the trustees will hire a single financial expert, who will determine the current and future losses suffered by the investors.
Note: This story has been change to reflect the fact that approval of the settlement is pending.