JPM Facing Massive PLS Buyback Claims


JPMorgan Chase Co.’s chief executive, Jamie Dimon, told investors at the beginning of 2011 that potential repurchases of private-label mortgage securities are “not that material” for his bank — an assertion that increasingly appears to be in doubt.

Dimon might not be quite so confident these days. Gibbs Bruns LLP, the law firm that negotiated an $8.5 billion mortgage repurchase settlement with Bank of America Corp. on behalf of a group of large investors, has announced that it is seeking put-backs on $95 billion in private-label mortgage-backed securities issued by JPMorgan Chase, Washington Mutual Inc. and Bear Stearns. Private-label securities are mortgage-backed securities or other bonds that are created and sold by companies other than government-sponsored entities like Fannie Mae and Freddie Mac.

“Our clients continue to seek a comprehensive solution to the problems of ineligible mortgages in RMBS [residential mortgage-backed securities] pools and deficient servicing of those loans. Today’s action is another step toward achieving that goal,” said Gibbs Bruns attorney Kathy Patrick in a press release Friday.

The law firm’s clients, which claim to own the requisite 25% of the deals necessary to mount a challenge, have instructed trustees of 243 securitizations to begin seeking loan put-backs. In practice, this would entail stepping aside and allowing the law firm to file suits.

JPMorgan Chase did not respond immediately to a request for comment by American Banker.

The company has appeared to take private-label repurchases more seriously of late. “We’ve been sued at [over] $54 billion of securities,” Dimon said at a Goldman Sachs investor conference earlier this month. “We expect that number to go up … We’ve hired top lawyers … top mortgage people, to make sure we understand exactly the exposure.”

Were private-label investors to enjoy the same success as GSEs have had — which is unlikely, given that they have weaker contractual rights — JPMorgan Chase’s exposure could potentially rise to $6 billion, Dimon said. He added, however, that he believes it will be “pretty tough” for investors to prove their claims.

“If someone was going to be reasonable on this, we’d have a conversation, [but] it in my opinion [it] is unlikely,” he said at the conference. “It’s just too complicated. It’s loan-by-loan, sometimes it is tranche-by-tranche. And there are too many players.”

JPMorgan Chase’s reserve for repurchase claims is “predominantly calculated based on the Firm’s repurchase activity experience with the GSEs,” the company said in its most recent quarterly filing with the Securities and Exchange Commission. “While it is possible that the volume of repurchase demands from … private-label securitizations will increase in the future … the firm cannot offer a reasonable estimate of those future demands.”

To formally reserve for legal loss, accounting rules require that claims be both probable and calculable.

While less dramatic, JPMorgan Chase’s acceptance that private-label put-backs at minimum will involve it in a large legal battle echoes Bank of America CEO Brian Moynihan’s famous comparison of disgruntled investors to consumers who had purchased low-end Chevys and then sued over sub-Mercedes quality performance. That was before Moynihan backtracked and entered into a settlement with investors.

Daily Briefing | Friday, December 23, 2011

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