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SEC charges JP Morgan Securities with misleading investors in RMBS offerings

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The Securities and Exchange Commission has charged JP Morgan Securities and affiliated entities with misleading investors in offerings of residential mortgage-backed securities (RMBS).

The firm agreed to a settlement in which it will pay USD296.9m. The SEC plans to distribute the money to harmed investors.

The SEC alleges that JP Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter. JP Morgan received fees of more than USD2.7m, and investors sustained losses of at least USD37m on undisclosed delinquent loans.

JP Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least USD137.8m.

According to the SEC’s complaint against JP Morgan filed in federal court in Washington D.C., federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering. Information about the delinquency status of mortgage loans in an RMBS transaction is important to investors because those loans are the primary source of funds by which investors can earn interest and obtain repayment of their principal.

The SEC alleges that in the prospectus supplement for the USD1.8bn RMBS offering that occurred in December 2006, JP Morgan made materially false and misleading statements about the loans that provided collateral for the transaction. The firm represented that only four loans (0.04 per cent of the total loans collateralising the transaction) were delinquent by 30 to 59 days, and that those four were the only loans that had had an instance of delinquency of 30 or more days in the 12 months prior to the "cut-off date" for the transaction. However, at the time JP Morgan made these representations, the firm actually had information showing that more than 620 loans (above seven per cent of the total loans collateralising the transaction) were, and had been, 30 to 59 days delinquent, and the four loans represented as being 30 to 59 days delinquent were in fact 60 to 89 days delinquent.

The SEC’s complaint also alleges that Bear Stearns’ bulk settlements covered loans collateralising 156 different RMBS transactions issued from 2005 to 2007. Loan originators were usually required by contract to buy back loans that suffered early payment defaults or had other defects. However, Bear Stearns frequently negotiated discounted cash settlements with these loan originators in lieu of a buy-back on loans that were owned by the RMBS trusts. The firm – both before and after the merger with JP Morgan – then kept most of the bulk settlement proceeds. The firm failed to disclose the practice to investors who owned the loans. Bear Stearns repurchased only about 13 per cent of these defective bulk settlement loans from the trusts, compared to a nearly 100 per cent repurchase rate when loan originators agreed to buy back the defective loans. For most loans covered by bulk settlements, the firm collected money from originators without paying anything to the trusts.

JP Morgan and JP Morgan Acceptance Corporation I settled the SEC’s charges by consenting to pay disgorgement of USD39,900,000, prejudgment interest of USD10,600,000, and a penalty of USD24,000,000 for the delinquency misstatements, which the SEC will seek to distribute to harmed investors in the transaction through a Fair Fund.

JP Morgan, EMC Mortgage, Bear Stearns Asset Backed Securities I, Structured Asset Mortgage Investments II and SACO I agreed to pay disgorgement of USD137,800,000, prejudgment interest of USD24,265,536, and a penalty of USD60,350,000 for the bulk settlement practice misconduct, and the SEC will seek to distribute these funds to harmed investors through a separate Fair Fund.

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