JPMorgan Settles With Justice Department for $13B: WSJ

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) has agreed to a $13 billion settlement with the Department of Justice of multiple criminal and civil investigations of its mortgage lending and sales activities, according to a Wall Street Journal report.

According to the report -- filed Monday evening and citing unnamed sources -- the nation's largest bank by total assets has agreed as part of the settlement to pay $4 billion "to help distressed homeowners." This assistance will include principal write-downs of between $1.5 billion and $1.7 billion for borrowers whose mortgage loans are held by JPMorgan Chase, with loan balances exceeding the value of the collateral homes. Another $300 million to $500 million will be allocated to restructuring loans to reduce monthly payments.

The remaining portion of the $4 billion in assistance to distressed borrowers will directed in other ways, "including new originations for low- and moderate-income borrowers or absorbing the remaining principal owed on properties that have been vacated but not yet foreclosed upon," according to the Wall Street Journal report.

The total settlement with the Justice Department and regulators includes the settlement with the Federal Housing Finance Agency (FHFA) late last month, under which JPMorgan and subsidiaries agreed to pay a total of $5.1 billion to Fannie Mae ( FNMA) and Freddie Mac ( FMCC), to settle the government sponsored enterprises' loss claims on mortgage-backed securities sold to them by JPMorgan Chase, its subsidiaries and Bear Stearns.

JPMorgan acquired Bear Stearns in March 2008, as Bear faced bankruptcy amid a liquidity crisis.

The Wall Street Journal report didn't include any detail on how much of the settlement with the Justice Department would cover sales of mortgage-backed securities by Washington Mutual, which was shuttered by regulators in September 2008 and sold by the Federal Deposit Insurance Corp. to JPMorgan Chase. However, the Financial Times on Monday reported that JPM had "conceded it will take responsibility for the past misdeeds of Washington Mutual."

JPMorgan on Friday announced a separate agreement to pay $4.5 billion to a group institutional investors to settle loss claims on residential mortgage-backed securities (RMBS) issued by the JPMorgan, Chase and Bear Stearns between 2005 and 2008.

That agreement didn't cover sales by Washington Mutual, however, Morgan Stanley analyst Betsy Graseck in a note to clients on Monday wrote that her firm was assuming that Washington Mutual's liability for RMBS sales to institutional investors would remain with the FDIC. "If we're wrong, our bear case assumes a $3.3b payout," she wrote.

JPMorgan's third-quarter earnings were wiped out by a $9.15 billion provision for litigation expenses. The company reported having $23 billion in litigation reserves as of Sept. 30, and said in a filing with the Securities and Exchange Commission on Friday that "The firm believes it is appropriately reserved for this and any remaining RMBS litigation matters."

The company's fourth-quarter legal tab, assuming the $13 billion figure for the Justice Department settlement holds, is $17.5 billion. If JPMorgan is forced to fork over another $3.3 billion for mortgage putback claims against Washington Mutual -- based on Graseck's estimate -- the total tab will come to $20.8 billion, leaving $2.2 billion in remaining litigation reserves.

JPMorgan's shares closed at $55.74 Monday. The shares are cheaply priced relative to most large-cap U.S. banks, trading for 9.3 times the consensus 2014 earnings estimate of $6.02 a share, among analysts polled by Thomson Reuters. The company will not continue its three-year streak of record earnings in 2013. JPM earned $21.3 billion, or $5.20 a share, during 2012.

The company's return on average tangible equity (ROTCE) was an impressive 14.72% during 2012, despite losses of over $6 billion from the "London Whale" hedge trading debacle. Investors expect a lower ROTCE this year, but the stock's relatively low valuation underlines the importance investors are placing on JPMorgan's attempt to put the bulk of its litigation risk behind it before the end of the year.

Graseck rates JPMorgan "overweight," with a price target of $67.00. She estimates the company's EPS will grow from $4.41 this year to $6.21 in 2014 and $6.82 in 2015.

JPM Chart JPM data by YCharts

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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