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The Much-Ballyhooed JP Morgan Settlement Is Just a Scam!

Here's how this so-called "big" fraud settlement is itself a big fraud.
 
 
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The first thing you need to know about JPMorgan Chase’s long-awaited  $13 billion dealwith the Justice Department — to settle a number of civil lawsuits related to the fraudulent sale of mortgage-backed securities — is that it’s not a $13 billion deal. $4 billion of this figure, over 30 percent, was  announced almost a month ago as the conclusion of a lawsuit between JPMorgan and the Federal Housing Finance Agency.

Attorney General Eric Holder, wanting to stand at a podium and give out a really big settlement number, simply folded the FHFA settlement into the Justice Department’s. Why news editors who have  already reported on the FHFA settlement would let the Justice Department use it again in its headline figure is completely beyond me. They aren’t obligated to do the Justice Department’s P.R. for them. We don’t say the Miami Heat beat the San Antonio Spurs 200-98, but 100 of those points came from a previous game.

So, let’s talk about this $9 billion settlement. Even that headline number doesn’t really reflect the actual penalty to JPMorgan Chase’s bottom line. Nearly half of the figure comes in the form of “mortgage relief,” which an independent monitor (and what’s so independent about a monitor chosen by the bank?) has four years to distribute. Any time you extend the time horizon of a penalty, you’re reducing its real value. And in this case, there’s not much value here to begin with.

The bank only has to put $1.2 billion of the $4 billion into first-lien principal reductions for homeowners facing foreclosure. $300 million goes toward extinguishing second liens, like a home equity line of credit. Another $300 million is earmarked for principal forbearance, where the homeowner still owes the money but gets to skip a few immediate payments. $2 billion would go toward interest-rate reductions or refinancing or even writing new mortgages for moderate-income borrowers (that’s a penalty, writing mortgages that pay the bank interest?), and the balance toward anti-blight provisions like bulldozing homes or buying out properties where the bank has delayed foreclosure.

Almost none of this represents a real penalty for the bank. It performs anti-blight procedures annually in its normal course of business. Principal forbearance has minuscule long-term cost. Second liens that typically cannot be recouped are worthless to a bank, and it’s hard to say it “costs” anything to extinguish them. The bank is even credited for writing down principal on loans owned by mortgage-backed securities investors, paying off their fine with other people’s money (the other people in this case being the very investors they defrauded!). And all the measures to help struggling homeowners actually help JPMorgan Chase in the long run, because it makes financial sense to modify loans rather than foreclose. It’s good to align financial incentives properly to force the bank to help homeowners now instead of kicking them out of their homes. But as a penalty for misconduct, it’s less than meets the eye, all told maybe 10 cents on the dollar to JPMorgan’s bottom line. Factor that in and you get a $5.4 billion deal.

As a side note, the principal reductions will actually  hurt homeowners more than they help them, unless Congress extends the Mortgage Forgiveness Debt Relief Act. If not, all principal reductions of this type will be taxable income for the homeowner. Poor people who need principal write-downs to save their house don’t typically have bags of cash lying around to pay off tax bills they didn’t think they’d get. The hardship exemptions for homeowners who cannot pay the tax require significant tax planning, the functional equivalent of declaring bankruptcy to the IRS. It will be a nightmare for homeowners who get blessed with this “gift.”

 
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