UPDATE: Allstate Sues J.P. Morgan Over $700 Million In Mortgage Securities
February 16 2011 - 3:37PM
Dow Jones News
Insurer Allstate Corp. (ALL) sued J.P. Morgan Chase & Co.
(JPM) over more than $700 million in residential mortgage-backed
securities--the latest to allege that a bank misled investors on
the quality of mortgages underlying securities.
In the suit, filed Tuesday in state court in New York City,
Allstate said 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 declined to comment Wednesday.
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 claimed 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.
The purchase price of the securities totaled $757.5 million.
The insurer said in the suit it recently analyzed 26,809
mortgage loans underlying its various certificates. It said the
prospectuses given to it to convince it to invest significantly
overstated such facts as the percentage of mortgages that were
owner-occupied homes, which are considered less likely to
default.
"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 said.
The suit alleged fraud and negligent misrepresentation and
sought 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
said.
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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