"The most egregious mistake was allowing borrowers to lie about their occupancy," Guy Cecala, publisher of Inside Mortgage Finance, said.
Occupancy was a focus of one of the lawsuits that was wrapped into the government settlement. The suit, brought by the Federal Housing Finance Agency, contended that in one bond deal, 15 percent of the loans were for a second home, five times the level stated in the deal's prospectus. The borrowers of most of those loans probably defaulted, which means the ultimate loss rate on the bond was probably far higher than 2.5 percent.
Other lawsuits allege far worse abuses. Some plaintiffs even assert that practically all the loans should never have been included in some bonds issued in 2006 and 2007. For instance, in litigation against Bear Stearns, private investors, after analyses of the underlying mortgages, have asserted that 80 to 100 percent of the loans did not meet minimum standards, according to a survey of court filings by Nomura.
These numbers may be exaggerated, given that they come from plaintiffs trying to maximize their chances of legal success. Still, Paul Nikodem, an analyst of mortgage-backed securities at Nomura, said that the surveys might have some validity. "There is evidence of multiple breaches within loans," he said.
The relative size of JPMorgan's payouts also seems to depend on who is suing the bank. The bank, for example, agreed to pay the Federal Housing Finance Agency $4 billion. That is 12 percent of the $33 billion of bonds identified in the agency's lawsuit — a high payout rate for a set of securities that, according to bond analysts, probably had low losses compared with subprime securities identified elsewhere in the $13 billion settlement.
Bear Stearns and Washington Mutual were among the worst offenders in the subprime market. But there were plenty of other big subprime players — Countrywide Financial, Merrill Lynch and even foreign institutions like Deutsche Bank and Royal Bank of Scotland among them. After the settlement details emerged on Tuesday, other banks were worried that they might be next.
"You'll have to ask them why they picked us first," JPMorgan's chief executive, Jamie Dimon, said in a public call on Tuesday afternoon with analysts, referring to government officials. "But it could've been somebody else."
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Even beyond the big numbers, the settlement served as a sad reminder that banks fell over themselves to lend to people who did not actually qualify for the loans. Some people took advantage of this and cynically obtained houses they could not afford. Many were less calculating and ended up victims of foreclosure.
The settlement sets aside $4 billion in mortgage relief for struggling borrowers.
Advocates for struggling homeowners contend that this relief needs to be directed primarily at writing down the value of mortgages, since that is likely to do the most to ease debt burdens. "If this settlement is to have teeth to help homeowners, 100 percent of it has to go to principal reduction," said Bruce Marks, chief executive of Neighborhood Assistance Corporation of America.
—By Peter Eavis of The New York Times