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A blog from CityRealty (Links below will take you to the 6sqft site)

Carter's View

JPMorgan Chase & Co. received a subpoena from the U.S. Securities and Exchange Commission over failed mortgages, a person familiar with the investigation said, as the agency probes banks including Credit Suisse Group AG (CS) for allegedly failing to share refunds from sellers of faulty debt, according to an article at bloomberg.net today by Jody Shenn, Shannon D. Harrington and Karen Freifeld.

Credit Suisse received a subpoena from the SEC last week, bond insurer MBIA Insurance Corp. said in a filing yesterday in a lawsuit against three of that Zurich-based bank's units and the S.E.C. asked New York-based JPMorgan for information after a court in January unsealed allegations made about Bear Stearns Cos.' practices in another suit, said the person, who declined to be identified because the matter isn't public, the article said.

Bond insurers MBIA and Ambac Assurance Corp. have said Credit Suisse and Bear Stearns, which JPMorgan bought in 2008, demanded refunds from originators that sold the banks the loans that they packaged into bonds, and then failed to use those settlement amounts to fulfill their own contractual promises on the debt, the article said.

"We're really starting to finally get into evidence that suggests blatant fraud," said Isaac Gradman, a San Francisco- based litigation consultant and formerly a lawyer at Howard Rice Nemerovski Canady Falk & Rabkin, the article said.

The article said that Jennifer R. Zuccarelli, a spokeswoman for New York-based JPMorgan, declined to comment and that Steven Vames, a Credit Suisse spokesman in New York, declined to comment on MBIA's statement about an SEC investigation and that John Nester, an SEC spokesman, declined to comment.

JPMorgan said in a regulatory filing today it's in "advanced discussions" with the SEC to resolve an investigation into collateralized debt obligations, which package assets such as mortgage bonds into new securities, the article said.

MBIA Insurance Corp., the bond insurance unit of Armonk, New York-based MBIA Inc. (MBI), disclosed Credit Suisse's SEC subpoena and the exhibit in a filing in New York State Supreme Court. The document, dated April 29, was filed yesterday.

MBIA, the article said, "alleges in its lawsuit that Credit Suisse failed to repurchase soured mortgages out of a 2007 securitization as it was contractually obligated to do. Earlier, the bank made demands similar to MBIA's to recover funds from the originators of the loans - money it didn't share with the securities' buyers, MBIA said....Credit Suisse, in a filing in MBIA's case on April 29, said contracts for its mortgage-bond transaction didn't call for the bank to repurchase loans simply because they became delinquent within a few months or involved borrower fraud. That differed from contracts between mortgage originators and Credit Suisse, the bank said."

"Credit Suisse," the article continued, "cited e-mails between its employees and MBIA officials before the deal closed, which the bank argued had stated explicitly that those so-called representations and warranties wouldn't be made. Representations and warranties are contractual promises that loans meet certain characteristics or will perform in certain ways. The loan originators' commitments to Credit Suisse "are different from - and materially broader than - Credit Suisse's representations and warranties" tied to the securitization transaction, the bank said in court filings. MBIA said in yesterday's court filing that Credit Suisse in some cases cited the same issues as it later did to reach settlements with lenders, and that any early loan defaults should have been seen as 'red flags' for further reviews of its obligations."

A review by Credit Suisse in 2006 showed that 60 percent of loans with early defaults failed to meet promised underwriting guidelines, MBIA said, citing an e-mail between the banks' employees.
Architecture Critic Carter Horsley Since 1997, Carter B. Horsley has been the editorial director of CityRealty. He began his journalistic career at The New York Times in 1961 where he spent 26 years as a reporter specializing in real estate & architectural news. In 1987, he became the architecture critic and real estate editor of The New York Post.
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