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From Banking and Finance Law Daily, October 28, 2013

FHFA, Freddie Mac, and Fannie Mae reach settlement with JPMorgan Chase

By Colleen Svelnis, J.D.

The Federal Housing Finance Agency (FHFA), as conservator for Freddie Mac and Fannie Mae, has announced settlements with JP Morgan Chase for $4 billion over claims alleging violations in connection with over $33 billion in private-label, residential mortgage-backed securities that were sold to the enterprises between 2005 and 2007. The agreements, dated Oct. 25, 2013, are between Freddie Mac and Fannie Mae, and JP Morgan Chase and certain affiliated entities.

Under the terms of the agreements, J.P. Morgan Chase will pay approximately $2.74 billion to Freddie Mac and $1.26 billion to Fannie Mae. “This is a significant step as the government and JP Morgan Chase move to address outstanding mortgage-related issues,” said FHFA Acting Director Edward J. DeMarco. “Further, I am pleased that a resolution of single family, whole loan representation and warranty claims could be achieved at the same time. This, too, will have a beneficial impact for taxpayers and the housing finance market.”

In 2011 the FHFA filed a complaint in the Southern District of New York alleging actionable conduct in connection with the offer and sale of residential mortgage-backed securities to Fannie Mae and Freddie Mac. The FHFA complaint alleged that JP Morgan Chase falsely represented that the underlying mortgage loans complied with underwriting guidelines and standards, including representations that significantly overstated the ability of the borrowers to repay their mortgage loans. The FHFA alleged that this violated the Securities Act of 1933, Virginia state law, District of Columbia law, and constituted negligent misrepresentation, common law fraud, and aiding and abetting fraud.

Repurchase liability. JP Morgan Chase has also agreed to resolve Fannie Mae's and Freddie Mac's repurchase claims associated with whole loan purchases from 2000 to 2008. Under the terms of the agreements, J.P. Morgan Chase will pay a total of approximately $1.1 billion—$670 million to Fannie Mae and $480 million to Freddie Mac. Under the agreement J.P. Morgan Chase will make the payments in the fourth quarter of 2013 and be released from repurchase liability for these loans, with certain exceptions. Freddie Mac CEO Donald H. Layton said of the agreements, “these settlements represent solid progress in our continuing efforts to resolve legacy issues and recoup funds that are due to America's taxpayers.”

The FHFA statement gives credit for initiating the settlement to U.S. District Court Judge Denise Cote and her direction to undertake mediation of the private-label, mortgage-backed securities cases under her jurisdiction. The FHFA has now settled four of the 18 the private-label, mortgage-backed securities suits it filed in 2011, and has stated its commitment to resolve the pending actions.

Under the settlement agreements, claims against JP Morgan in cases against First Horizon, SG Americas, Inc., and Ally Financial, Inc. were also dismissed.

JP Morgan Chase and Co, a global financial services firm, announced the settlements on their website. Fannnie Mae and Freddie Mac also announced the settlement and repurchase agreement on their websites.

Companies: JPMorgan Chase & Co.; Ally Financial Inc. formerly known as GMAC, LLC; First Horizon National Corporation; SG Americas, Inc.;

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