In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission has charged J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS).
The firms agreed to settlements in which they will pay more than $400 million combined, and the SEC plans to distribute the money to harmed investors.
Read: SEC close to settlement with mortgage agencies
The SEC alleges that J.P. Morgan misstated information about the delinquency status of mortgage loans that provided collateral for an RMBS offering in which it was the underwriter.
J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. J.P. Morgan also is charged for Bear Stearns’ failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million.
J.P. Morgan has agreed to pay $296.9 million to settle the SEC’s charges.
According to the SEC’s order against Credit Suisse, the firm similarly failed to accurately disclose its practice of retaining cash for itself from the settlement of claims against mortgage loan originators for problems with loans that Credit Suisse had sold into RMBS trusts and no longer owned.
Credit Suisse also made misstatements in SEC filings about when it would repurchase mortgage loans from trusts if borrowers missed the first payment due.
The firm made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to Credit Suisse’s practices concerning first payment defaults.
Credit Suisse has agreed to pay $120 million to settle the SEC’s charges.
“In many ways, mortgage products such as RMBS were ground zero in the financial crisis,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.
“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. 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.”
According to the SEC’s complaint against J.P. Morgan filed in federal court in Washington D.C., federal regulations under the securities laws require the disclosure of delinquency information related to assets that provide collateral for an asset-backed securities offering.
Information about the delinquency status of mortgage loans in an RMBS transaction is important to investors because those loans are the primary source of funds by which investors can earn interest and obtain repayment of their principal.