The scandal of the subprime mortgages closes for JP Morgan with a record plea deal. The American banking giant has closed negotiations with the US Justice Department by agreeing to pay 13 billion dollars to close the investigation against him. The "Wall Street Journal" writes it, specifying that the agreement should be made official in the next few hours. The institution will pay $4 billion to homeowners who have lost their homes and $9 billion to other investors. It is the most onerous settlement that has ever been signed between the Washington government and a company.
Not only that: the compensations will have to be paid by the end of 2016 and if the Bank does not respect this deadline, it could suffer other sanctions. Of the four billion, 1,5-1,7 billion will go to the people involved to reduce the rates on their mortgages, which in many cases have exceeded the value of their homes. Another 300-500 million will be used as aid to decrease the rates of consumers involved. The other half of the four billion could be used to reduce interest on existing loans.
According to the allegations, JP Morgan gave misleading information to mortgage giants Fannie Mae and Freddie Mac about the quality of the loans purchased during the housing boom.
THE MECHANISM OF SUBPRIME MORTGAGES
But how did the subprime mortgage scam work? In a nutshell, banks were pushing their customers to use homes as ATMs. For years real estate loans were taken out in series: the new loans served to pay off the previous ones and being of a higher amount (because in the meantime the price of houses had risen) they allowed families to pocket the difference. As soon as house prices stopped rising, the mechanism jammed and millions of Americans found themselves with a mortgage that could not be repaid. At that point the banks took over the houses.
As they pitched subprime to customers, lenders issued complex financials backed by those very mortgages. Derivative products that were more than risky (because it was clear that the subprime would not be covered), but which were sold as very safe investments to investors. All this also thanks to the complicity of the rating agencies, which (paid by the banks themselves, and therefore in conflict of interest) assigned triple A to those securities, the highest rating of reliability.
Attachments: Wall Street Journal
