Cutting to the (JPMorgan) Chase Mortgage Settlement

JPC

Nonprofits face desperate searches for the resources needed for their programs, but some big corporations don’t seem to face anything comparable, even after they are hit with massive penalties and fines by federal, or even international, regulators. For the likes of JPMorgan Chase, billion-dollar penalties seem like minor traffic road bumps, but maybe there’s something that nonprofits will be able to do with whatever JPM is being forced to shell out after the announcement of a huge settlement negotiated with the U.S. Department of Justice.

After my telling a relative that JPMorgan Chase, as a result of its record $13 billion fine plus several other pending investigations, was a corporate criminal, she responded that the company’s stock was nonetheless doing fabulously. She was right, of course. As the following chart shows, despite the cascading federal and international investigations of Jamie Dimon’s firm, the JPM price on the New York Stock Exchange has been healthy over the past year:

Fig 1
Source: http://chart.finance.yahoo.com/c/1y/JPM

While it doesn’t help nonprofits to be legal scofflaws, paying out $13 billion in penalties doesn’t hurt JPMorgan Chase much, given its market capitalization of $217.85 billion as of the end of last week and its continued strong revenues into 2013, even after taking the hit for extraordinary legal expenses. JPM’s financial resilience, however, didn’t stop its top lawyer, Stephen Cutler, from denouncing ever-larger penalties imposed by the Securities and Exchange Commission, presciently explaining, “We should all be concerned because at a certain point people become immune to the numbers.” Cutler ought to know. Before joining up to do legal battle on behalf of JPMorgan Chase, Cutler used to work the other side of the street, serving as the SEC’s chief of enforcement from 2001 to 2005.

Notwithstanding the ability of JPMorgan Chase to essentially shrug off the corporate financial impact of the record fine and penalty, will the $13 billion settlement with the Department of Justice do much to help the people who were harmed by the bank—and will nonprofits be in a position to access these funds to help ensure that at least some of the resources go to ameliorate the damage that JPMorgan caused?

The JPMorgan Chase Settlement Explained

As explained by the Justice department, the $13 billion settlement with JPMorgan addresses “federal and state civil claims arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS) by JPMorgan, Bear Stearns and Washington Mutual…[in which] JPMorgan acknowledged it made serious misrepresentations to the public—including the investing public.”

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” Attorney General Eric Holder was quoted to say in the Justice release. “JPMorgan was not the only financial institution during this period to knowingly bundle toxic loans and sell them to unsuspecting investors, but that is no excuse for the firm’s behavior.”

None of that suggests that $13 billion will be flowing to resolve the problems that JPMorgan Chase and its financial sector partners and peers created in the collapse of the mortgage markets during the past decade, but some portion of it should be available to nonprofits to do something to, as Associate Attorney General Tony West put it, “provide needed relief to areas hardest hit by the financial crisis.”

One potential resource is the $9 billion JPMorgan is paying to settle federal and state claims, as well as penalties, under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). States specifically in line to receive portions of the $9 billion include California ($298.9 million), Delaware ($19.7 million), Illinois ($100 million), Massachusetts ($34.4 million), and New York ($613.8 million).

There is also a strongly nonprofit-relevant provision that applies to the remaining $4 billion in the penalty, which JPMorgan is supposed to use as “relief to aid consumers harmed by the unlawful conduct…[to] take various forms including principal forgiveness, loan modification, [and] targeted originations and efforts to reduce blight.” According to the Justice Department press release, if JPMorgan falls short of this agreement by December 31, 2017, it will have to pay liquidated damages to NeighborWorks America, one of the nation’s premier nonprofit housing and community development financial and technical intermediary organizations.

Settlement Roles for Nonprofits

Before the 2017 deadline, the opportunities for nonprofits in the implementation of the consumer relief $4 billion should spark the imagination. According to the actual settlement agreement, $2 billion is designated for loan principal writedowns and payment forgiveness. The remaining $2 billion goes to a mix of mortgage rate reductions, low- and moderate-income disaster area lending, and “anti-blight” program activities.

Two broad areas of potential nonprofit involvement arise. In the lending category, the settlement calls for a “$10,000 Credit for purchase money loans to credit worthy borrowers” who might be in FEMA-designated disaster areas, or who have lost homes to foreclosures or short sales, or, in a very broad category of eligibility, who might be first-time low- or moderate-income homebuyers. In the anti-blight category, JPMorgan Chase will be offering cash for the demolition of dilapidated properties, donating mortgages or REO properties (“real estate owned,” the shorthand for property owned by the lender because of its inability to dispose of the property at a foreclosure auction) to municipalities with landbanks, to military veterans with disabilities, and to families of deceased members of the military, and donating funds “to capitalize community equity restoration funds or substantially similar community redevelopment activities.”

The Washington Post headlined this agreement as “a win for communities hit hard by the housing crisis,” but others observers have been much less breathless about the agreement. Writing for the New York Times’s “DealBook” blog, Wayne State University law professor Peter J. Henning was substantially more reserved about the agreement. Pointing out that JPMorgan told investors that it didn’t admit to any violations of the law in the settlement, Henning noted that included in the $13 billion was $4 billion that JPMorgan had already agreed to pay regarding claims filed on behalf of Fannie Mae and Freddie Mac plus additional billions to settle the claims of other purchasers of securities issued by JPMorgan (or Bear Stearns and Washington Mutual, which JPMorgan acquired as they collapsed), who were “sophisticated buyers, not mom-and-pop investors.”

Regarding the $4 billion in consumer relief, Henning observes that JPMorgan isn’t going to be taking much of a hit in its pocketbook:

“No one should be misled into concluding that JPMorgan will be paying out of its pocket all the money that this part of the settlement requires. Reducing the principal owed on a mortgage or its interest rate affects the value of the loan but does not require an immediate expenditure in most cases. Moreover, the program can actually benefit the bank because keeping a borrower in a house who continues to pay the mortgage, even at a reduced rate, is superior to foreclosing on the property and suffering a far greater loss in most instances.”

In other words, the settlement’s principal reduction and forbearance provisions, not to mention its lending to low- and moderate-income homebuyers, especially in what the settlement terms “hardest hit areas” (the HUD map of hardest hit areas is here), may well be good business for the scofflaw financial behemoth. Moreover, of the total $13 billion, only $2 billion will come out of JPMorgan Chase’s after-tax profits; the remainder can be written off as business expenses.

The associate director of the California Reinvestment Coalition, Kevin Stein, called the $4 billion in consumer relief “just a drop in the bucket.” If all $4 billion were put to principal reduction, it wouldn’t be much compared to the $1.4 trillion in mortgage debt held by JPMorgan. In addition, the settlement gives credit to JPM for forbearance; that is, for reducing or forgiving some homeowners’ mortgage payments, which, given that the borrowers were facing foreclosure, the bank might not have received anyhow. That doesn’t alter the basic economics of the mortgages, wherein the principal may be much higher than the properties’ market value. Stein notes that if Congress doesn’t extend the Mortgage Debt Forgiveness Act, homeowners who might get JPMorgan mortgage writedowns could be hit by unexpected tax bills.

While the $13 billion in this instance from JPMorgan may be the biggest penalty imposed on a single corporation, JPMorgan last year was one of five mortgage providers and servicers (the others were Bank of America, Wells Fargo, Ally/GMAC, and Citi) that signed onto a deal with the federal government and the attorney general in 49 states (Oklahoma wasn’t a party to the settlement) to provide $25 billion in principal reduction modifications and other kinds of relief for borrowers as a result of the banks’ “robo-signed” affidavits in foreclosure proceedings. Despite the enthusiasm that greeted that historic settlement at the time, by last summer two attorneys general (Eric Schneiderman of New York and Lisa Madigan of Illinois) as well as the agreement’s national monitor were complaining vociferously that the participating banks had violated terms of the agreement and had “dragged their feet in processing homeowners’ requests for lower monthly loan payments.” The implication was that homeowners looking for mortgage redress were suffering through “the same miscommunication, delays and botched paperwork that was commonplace after the housing bust.” Last month, AG Schneiderman announced that he was going to file suit again against Wells and BofA for violating the terms of the settlement.

Making This Settlement Work—Four Nonprofit Do’s and Don’ts

My cousin was right about JPMorgan in many ways. In 2012, it had earnings of $20 billion, and through the first three quarters of 2013, $12 billion—that’s despite the hit on legal costs. With a window until the end of 2017 for spending the $4 billion for consumer relief, against JPMorgan’s income, it might be hard to even see the impact in the corporation’s bottom line. Somehow, banks like JPMorgan Chase can get excoriated in the press, by the regulators, and by prosecutors, but they continue to float along without suffering a modicum of the pain that homeowners and neighborhoods have endured as a result of their toxic mortgages. What can be done to make this deal with JPMorgan different—especially involving the nonprofit sector?

First, prosecute whoever is responsible for criminal wrongdoing. The agreement doesn’t preclude the government from taking legal action against the bank executives who were personally responsible for the designing and implementing the toxic mortgage strategy of JPMorgan (or Bear Stearns and Washington Mutual). According to The Nation, the most important criticism of the settlement is “that no actual bank executives were charged—despite the fact that the Justice Department clearly established a pattern of misconduct at many different levels of the bank.” By this point in what Public Citizen’s Bartlett Naylor coins as the “immaculate conception” theory of bank wrongdoing, it should be clear that without individual prosecutions, both the deterrence to bad bank behavior and the incentive for bank compliance with these settlement agreements are weak.

The Obama administration has been pretty abysmal in going after individual bankers who could have and perhaps should have been prosecuted for fraud. According to Harvard Law professor Lawrence Lessig, “We live in a world where the architects of the financial crisis regularly dine at the White House.” Bankers knew the products they were foisting on the public were junk, or in the words of the Justice Department regarding JPMorgan Chase, toxic—and, as such, fraudulent. If you want to see JPMorgan snap to it on the implementation of this agreement, nonprofits would do well to press for criminal proceedings against individual bankers.

Second, look at the penalties going to Justice. There is at least $1–2 billion in funds that, rather than being used to pay for the cost of DOJ lawyers (technically already covered in the Justice budget) or being dumped into the general treasury, could be used to subsidize the costs of housing counselors and others working for nonprofits to serve as advisors and advocates for homeowners seeking assistance and redress from JPMorgan. If, in the last agreement, homeowners still found themselves getting the same kinds of runarounds that they got at the height (or depth) of the recession, arming an army of nonprofit advocates from the administrative penalties paid to Justice, meaning with no diversion of funds that should benefit homeowners and other consumers, could result in real change on the part of the bank.

Third, it seems odd that the settlement doesn’t call for JPMorgan Chase to stop foreclosure actions that may be already underway. If homeowners might, in the end, be eligible for pre-foreclosure mortgage loan modifications, why proceed with foreclosure actions that would preclude the possibility of principal writedown assistance? This is where the national nonprofit advocacy organizations should come in: to go beyond what Justice has accepted, and push for a freeze in JPMorgan Chase foreclosure actions so that people might be able to stay in their homes.

Fourth, the provisions of the settlement allowing JPMorgan Chase to get credit for donations of money and property to nonprofits are fine, except that they should be on top of what JPMorgan already gives as donations to nonprofit developers. For example, according to the Foundation Center’s online grants database, in 2012, the JPMorgan Chase Corporate Giving Program gave $2 million to the Northern California Community Loan Fund, and the JPMorgan Chase Foundation in 2013 awarded the Neighborhood Reinvestment Corporation (d.b.a. NeighborWorks America) $1.5 million. In 2011, the foundation made grants for housing, community development, and lending to groups such as Vanguard Community Development Corporation in Detroit ($200,000 for the North End Improvement program), the Florida Community Loan Fund ($100,000), the Housing Partnership Development Corporation in New York ($50,000), the Wilmington Housing Partnership in Delaware ($150,000), the San Francisco Housing Development Corporation ($50,000 for the Bayview Financial Stabilization program), the Northern California Community Loan Fund ($2 million), the Long Island Housing Partnership ($65,000), the Gulf Coast Housing Partnership in New Orleans ($80,000), Chicanos por la Causa in Arizona ($90,000 for pre-purchase counseling), Living Cities ($175,000), the Housing and Community Development Network of New Jersey ($90,000), the Community Loan Fund of New Jersey ($4 million), the Chicago Community Loan Fund ($2 million), and Habitat for Humanity of New Castle County, Delaware ($150,000).

JPMorgan Chase should neither be allowed to credit existing and typically supported grantmaking to the settlement agreement, nor permitted to suddenly turn down longtime grantees because the corporation faced coming up with money for the settlement. Nonprofit grant recipients should be attentive to make sure that JPMorgan Chase doesn’t suddenly call long-term, historic grant relationships “new” for the purposes of meeting the strictures of the settlement agreement. JPMorgan also shouldn’t be able to use the settlement as a one-size-fits-all shield against current grantees in order to shift their grant dollars to groups whose activities would count for the settlement. As part of the settlement, JPMorgan should be delivering additional new dollars, not retitling and repurposing largely existing funds.

To be sure, there are benefits to homeowners and communities as part of the $13 billion JPMorgan Chase settlement. Significant involvement by nonprofits can help ensure that the funds actually benefit the intended beneficiary homeowners and communities. But nonprofits shouldn’t allow themselves to be played by the corporation, no matter how attractive the deal. Nonprofits can take service provider roles in the JPMorgan Chase settlement, but not at the expense of their roles as advocates and truth-tellers.

 

About

Rick Cohen

Rick joined NPQ in 2006, after almost eight years as the executive director of the National Committee for Responsive Philanthropy (NCRP). Before that he played various roles as a community worker and advisor to others doing community work. He has also worked in government. Cohen pursues investigative and analytical articles, advocates for increased philanthropic giving and access for disenfranchised constituencies, and promotes increased philanthropic and nonprofit accountability.

  • Susan Sanford

    If the nonprofits don’t have to be just housing, Feeding America would be a good choice. They help food banks in every state and county in the country!

  • Marc Cobe

    Money speaks sense in a language all nations understand.

  • Alonzo Harris

    My mother “Thelma Wright” was diagnosis with “Breast Cancer Stage IV Aden Carcinoma!” JP Morgan Chase Bank knowingly and intentionally with total disregards for the Truth of her Breast Cancer status. JP Morgan Chase Bank imposed a foreclosure upon her it “inflicted emotional distress”. On December 21, 2013, she took her last breath. JP Morgan Chase Bank “did not” care after Congress halted all foreclosures on Cancer Patients.

    I written JP Morgan Chase Bank numerous of Letters in regards to “loan modification due to financial hardship since 2009 through now 2014. Every letter never resolve the problem. My mother health continue to go downhill because this foreclosure inflicted so much stress she couldn’t recover like she was supposed too…

    Then you read and research the internet, see that JP Morgan Chase Bank $13 Billion Settlement.
    1. $4 Billion in aid to distressed homeowners raised serious questions after my Mother died from JP Morgan intentional infliction of emotional distress.

    2. Cindi Davis v. Well Fargo Bank received national news attention, as she was battling Breast Cancer Stage 4 & Foreclosure!

    Question:

    a) Where does JP Morgan’s $13 Billion Go???
    b) Where the distribution of funds for the distressed homeowners??
    c) Where does $4 Billion in aid to distressed homeowners go?

    . “JP Morgan’s CEO Jamie Dimon will hire an outside monitor to oversee the distribution of the funds to homeowners…”

    My Mother is by Law entitled to some of this $13 Billion Settlement as JP Morgan Chase Bank admitted Liability!!