WASHINGTON — The Justice Department and JPMorgan Chase have reached agreement on all issues — including one involving failed Seattle-based Washington Mutual — in a $13 billion settlement of a civil inquiry into the company’s sales of low-quality mortgage-backed securities that collapsed in value in the financial crisis, a person close to the talks said late Monday.
The person said the documents spelling out the agreement could be signed as early as Tuesday. The person spoke on condition of anonymity because the deal has yet to be finalized.
The settlement is the largest ever reached between the government and a corporation. It eclipses the record $4 billion levied on oil giant BP in January in the worst offshore oil spill in U.S. history.
The nation’s biggest bank will pay more than $6 billion to compensate investors, pay $4 billion to help struggling homeowners and pay the remainder as a fine.
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The final issue — one that was not resolved until Monday — revolved around the $4 billion to compensate consumers.
According to the person close to the talks, some $1.5 billion will be a write-down forgiving homeowner loans, $300 million will enable homeowners to pay less now on their mortgages, and the remainder of the $4 billion will go toward reducing existing loans, originating new loans and helping revive blighted properties in some of the hardest-hit areas of the housing crisis, such as Detroit.
An independent monitor will be appointed to oversee the assistance to homeowners.
The deal is the latest chapter in the burst of the housing bubble in 2007 when bundles of mortgages sold by JPMorgan and other financial institutions left investors with billions of dollars in losses.
JPMorgan has said that most of its mortgage-backed securities came from Bear Stearns and Washington Mutual, troubled companies that JPMorgan acquired in 2008.
Still to come is a decision on whether the Justice Department will file criminal charges against JPMorgan. An investigation is under way by the U.S. Attorneys Office in Sacramento, Calif.
As part of the $6 billion to investors, $4 billion will resolve government claims that JPMorgan misled mortgage-finance giants Fannie Mae and Freddie Mac about risky mortgage securities the bank sold them before the housing market crashed.
That part of the deal was announced on Oct. 25. Fannie and Freddie were bailed out by the government during the crisis and are under federal control.
The Justice Department and the banks reached a tentative settlement in mid-October on the $13 billion, but the negotiations hit a stumbling block that has now been resolved.
As part of any settlement, JPMorgan wanted to be able to collect money from a receivership involving Washington Mutual, the biggest U.S. savings and loan.
The S&L failed and was purchased by JPMorgan. The Federal Deposit Insurance Corp., which maintains stability and public confidence in the banking system, said JPMorgan should be responsible for any liabilities regarding the Washington Mutual acquisition.
Bloomberg News, citing people briefed on the matter, reported that JPMorgan has agreed to drop litigation against the FDIC over some mortgage bonds sold by Washington Mutual. The agreement won’t interfere with JPMorgan’s ability to sue the FDIC to cover part of a $4 billion settlement last month with the Federal Housing Finance Agency, the people said. It also won’t prohibit JPMorgan from seeking reimbursement from the FDIC for claims against Washington Mutual from private investors.
Mounting legal costs from government proceedings pushed JPMorgan to a rare loss in this year’s third quarter, the first under CEO Jamie Dimon’s leadership.
The bank reported Oct. 11 that it set aside $9.2 billion in the July-September quarter to cover the string of legal cases against the bank. JPMorgan said it has placed $23 billion in reserve to cover potential legal costs.
On Nov. 15, the company announced it had reached a $4.5 billion settlement with 21 major institutional investors over mortgage-backed securities issued by JPMorgan and Bear Stearns between 2005 and 2008.
The investors, which include Goldman Sachs, said the bank deceived them about the quality of high-risk mortgage securities.
JPMorgan has faced other issues as well.
• In September, it agreed to pay $920 million and to admit that it failed to oversee trading that led to a $6 billion loss last year in its London operation. In a separate case, the bank agreed to pay a $100 million penalty and admitted that its traders acted “recklessly” with the London trades. The Justice Department is pursuing a criminal investigation of the trading loss and a possible cover-up at the bank.
Other banks have run into trouble, too.
In August, the Justice Department accused Bank of America of civil fraud in failing to disclose risks and misleading investors in its sale of $850 million in mortgage bonds in 2008. The Securities and Exchange Commission filed a related lawsuit. The government estimates that investors lost more than $100 million. Bank of America disputes the allegations.
Goldman Sachs, Citigroup and other big banks — as well as JPMorgan — have been accused by the SEC of abuses in sales of securities linked to mortgages in the years leading up to the crisis.
Together they have paid hundreds of millions in penalties to settle civil charges brought by the SEC, which accused them of deceiving investors about the quality of the bonds they sold. JPMorgan settled SEC charges in June 2011 by agreeing to pay $153.6 million and reached another such agreement for $296.9 million last November. The banks in all the SEC cases were allowed to neither admit nor deny wrongdoing, bringing criticism of the agency from judges and investor advocates.