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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