TheMReport — News and strategies for the evolving mortgage marketplace.
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feature ORIGINATION PMorgan Securities LLC and Credit Suisse Securities paid a combined $416.9 million to settle charges of misleading investors in the sale of residential mortgage-backed securities (RMBS), the Securities and Exchange Commission (SEC) announced. According to the SEC's complaint against JPMorgan, the bank misstated information about the delinquency status of mortgages that provided collateral for an RMBS offering it underwrote. JPMorgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans, the SEC says. JPMorgan is also charged for Bear Stearns' failure to disclose its practice of keeping cash settlements from mortgage loan originators on problem loans that it sold into RMBS trusts. JPMorgan acquired Bear Stearns in 2008. The proceeds from this bulk settlement practice were at least $137.8 million, the SEC says. JPMorgan agreed to pay $269.9 million to settle the charges. It did not admit or deny them. "The SEC's complaint makes allegations under the negligence-based provisions of the federal securities laws and does not include charges of intentional misconduct. JPMorgan is pleased to have reached agreement with the SEC to put these matters concerning RMBS behind it," the bank said in a statement. In Credit Suisse's case, the SEC alleges the firm similarly failed to disclose its practice of retaining cash from the settlement of claims against originators for problems with loans sold into trusts. Credit Suisse also made misstatements in SEC filings about when it would repurchase loans from trusts if borrowers missed the first payment due, the agency says. According to the SEC, Credit Suisse made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to the firm's practices concerning first payment defaults. Credit Suisse has agreed to pay $120 million to settle the charges. Like JPMorgan, the firm neither confirmed nor denied the allegations and pointed out in a statement that the SEC's allegation was of negligence and not of intentional recklessness. The combined money will be distributed to "harmed investors," the SEC said. The M Report | 43 se c on da r y m a r k e t J a na ly t ic s Major financial institutions agreed to pay more than $400 million in a fault-free agreement that would atone for the alleged misrepresentation of pre-crisis securities portfolios. Robert Khuzami, director of the SEC's Division of Enforcement, said products such as RMBS were "ground zero in the financial crisis." "Misrepresentations in connection with the creation and sale of mortgage securities contributed greatly to the tremendous losses suffered by investors once the U.S. housing market collapsed," Khuzami said. "Today's actions involving RMBS securities are a continuation of the SEC's strong efforts to pursue wrongdoing committed in connection with the financial crisis." The charges were filed in coordination with the RMBS Working Group, a federal-state task force launched to investigate "those responsible for misconduct that contributed to the financial crisis through the pooling and sale of RMBS." Khuzami works as a co-chair of the group. "Today's actions are another step forward in the process of bringing accountability for the misconduct that led to the collapse of the housing market," said New York State Attorney General Eric Schneiderman, another of the RMBS Working Group's co-chairs. "We will continue to work together on behalf of consumers and investors to ensure that it never happens again." s e r v ic i ng Before and After: Past Mistakes Haunt Big Banks in Dodd-Frank Era an estimated 1.3 million to 1.7 million additional housing units expected to be demanded in the next several years) and home purchases. As a result, the recovering purchase mortgage market could expand to exceed $1 trillion, creating a net for the industry as refinance volume falls. In total, FBR anticipates overall originations between $1.5 trillion and $2 trillion during the next five years. What strategy is FBR championing for lenders hoping to pave the way for a brighter future for mortgage banking? "We believe the largest opportunities in mortgage originations are with a smaller, mortgage-concentrated model," the group concluded, adding that such a model allows "lenders to have the appropriate local knowledge to understand their market risk while maintaining the necessary regulatory quality controls." Or ig i nat ion In addition, with larger banks like Citigroup, JPMorgan Chase, and Bank of America scaling back their lending operations (leaving behind an estimated $1.3 trillion in annual origination capacity), "the opportunity set for smaller players in the origination and refinancing market has increased." While Wells Fargo continues to dominate the market, FBR notes the biggest lender's originations are flat relative to pre-crisis levels. As a result, about 60 percent of the market will still be driven by smaller players. At the same time, originations are expected to continue growing as a demographic shift supports a healthier purchase market. With the average homebuying age at 34, the market is squarely in the hands of the large "echo boom" generation, or the children of the baby boomers. This phenomenon will lead to a boom in construction (with