A law firm that led mortgage bondholders to extract a $8.5 billion settlement from Bank of America Corp is turning its sights on JPMorgan Chase & Co.
Houston-based Gibbs & Burns LP said on Friday its clients have instructed trustees overseeing $95 billion of securities issued in the housing boom by JPMorgan's affiliates to investigate whether ineligible mortgages were included in collateral behind the bonds.
Gibbs & Burns said its clients represent holders of more than 25 per cent of the voting rights on 243 residential mortgage-backed securities (RMBS).
JPMorgan spokeswoman Kristin Lemkau declined to comment.
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The development marks an escalation of legal challenges from the housing bust for JPMorgan. The largest US bank by assets, JPMorgan has been setting aside billions of dollars for claims that mortgage bonds sold by Chase bank, and by companies it bought, were backed by fraudulent loans or otherwise flawed.
Mortgage securities typically set a threshold of 25 per cent of voting rights above which organised investors gain additional legal power over the pools, said Greg Taxin of Spotlight Advisors LLC, which advises pension funds on mortgage bond investments.
"This is what started the ball rolling that ultimately led to the $8.5 billion settlement with Bank of America," said Taxin. "The best defence for JPMorgan has been that the investors were not coordinated."
Paul Miller, an analyst at FBR Capital Markets, said, "It was only a matter of time before they went after JPMorgan."
The settlement with Bank of America is pending and being challenged in court as insufficient by other holders of its mortgage bonds.
Kathy Patrick of Gibbs & Bruns LLP said in a statement, "Our clients continue to seek a comprehensive solution to the problems of ineligible mortgages in RMBS pools and deficient servicing of those loans."
The investors represented by the firm own securities issued in 2005, 2006 and 2007. They include bonds from Bear Stearns and Washington Mutual, two firms which JPMorgan took over during the financial crisis.
JPMorgan is in a better position than Bank of America to deal with the legal claims, said Miller. It is not clear that the bank is responsible for mortgages made by Washington Mutual, which the government put into JPMorgan's hands after it failed, he said.
Bank of America, in contrast, had bought mortgage-maker Countrywide, the source of most of its problem securities, on its own before the crisis.
Also, JPMorgan has already booked litigation expenses when it added to reserves. "For something like this, they are well-reserved," Miller said.
JPMorgan shares closed up 14 cents to $31.90 on the New York Stock Exchange on Friday.