Allstate Sues JPMorgan Over $700 Million In Mortgage Securities

Insurer Allstate Corp. (ALL) sued J.P. Morgan Chase & Co. (JPM) over $700 million in residential mortgage-backed securities, the latest to allege a bank misled investors on the quality of mortgages underlying securities.

In the suit, filed Tuesday in New York state court, Allstate alleges J.P. Morgan and its various entities sold Allstate a "toxic mix of loans given to borrowers that could not afford the properties" all the while telling Allstate it was buying a safe security.

A J.P. Morgan spokeswoman wasn't immediately available.

The banking industry is facing myriad lawsuits over mortgage-backed securities they packaged and sold to investors. The creation of the securities helped fund the creation of new mortgages, which increasingly went to borrowers who ultimately couldn't afford their homes. The securities, which had high credit ratings at the time, blew up in spectacular fashion when the housing bubble burst, and many investors have sued the banks seeking to recoup their losses.

Allstate alleges it bought pass-through certificates into the securities on the basis of "material misrepresentations and omissions" by J.P. Morgan about the riskiness of the securities.

"For instance, recent reviews of the loan files underlying some of Allstate's certificates reveal a pervasive lack of proper documentation, facially absurd (yet unchecked) claims about the borrower's purported income, and the routine disregard of purported underwriting guidelines," the suit reads.

The suit alleges fraud and negligent misrepresentation and seeks damages for Allstate's losses along with other fees.

Last month, J.P. Morgan said it added $1.5 billion in litigation reserves during its fourth quarter to handle similar lawsuits and said it has $3 billion in reserves for demands from private investors that it repurchase back mortgage-backed securities. Repurchase requests are generally harder to achieve, the bank says.

While Chief Executive Jamie Dimon said last month the bank expects many legal fights, he added it wasn't "that material of an issue."

"This could be a long, ugly mess," Dimon said. "The important thing is it's not going to be life threatening."

-By David Benoit, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

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