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Successor JP Morgan Chase is Sued Over Billions in Fraudulent Mortgage-Backed Securities Sold by Bear Stearns

by Jay Salamon on October 3, 2012

in Securities Law

The Stockmarketloss.com group of Hermann, Cahn & Schneider LLP is investigating potential individual and group claims concerning mortgage-backed securities sold by Bear Stearns and/or EMC Mortgage, including the following:

  • Bear Stearns Alt-A Trust
  • Bear Stearns Asset Backed Securities I Trust
  • Bear Stearns Asset Backed Securities Trust
  • Bear Stearns Mortgage Funding Trust
  • Bear Stearns Second Lien Trust
  • SACO I Trust
  • Structured Asset Mortgage Investments II Trust

Because of time limitations potentially applicable to purchasers of these products, investors could soon begin losing their rights to pursue compensation from Bear Stearns’ successor-in-interest, JP Morgan Chase & Co.  Consequently, if you bought a Bear Stearns mortgage-backed investment product, we urge you to contact us immediately.

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On October 1, 2012, JPMorgan Chase & Co., America’s largest bank, was sued by the State of New York over allegations that Bear Stearns – a broker-dealer the bank took over in 2008 – defrauded investors out of tens of billions of dollars. Bear Stearns allegedly mislead investors about the quality of the mortgage debt that formed the basis for its mortgage-backed securities. According to documents filed with the Supreme Court of the State of New York, “Defendants systematically failed to fully evaluate the loans, largely ignored the defects that their limited review did uncover, and kept investors in the dark about both the inadequacy of their review procedures and the defects in the underlying loans.”

The products sold by Bear Stearns were a type of investment called Mortgage-Backed Securities, often referred to as “MBS” An MBS is a type of asset-backed security that consists of large numbers of mortgages, home-equity loans, and subprime mortgages. The original idea was to amalgamate a bunch of residential loans with dependable cash flows into one pooled investment vehicle: the MBS. The MBS issuer would collect all of the individual loan revenues and pay investors periodic distributions of the principal and interest generated by the underlying loan portfolio.

When the housing market hit the stratosphere, lenders found it profitable to originate mortgages that previously would have been deemed too risky. Mortgage lenders began to overlook even basic requirements for borrower income and down payments, assuming that with real estate prices rising so fast, almost any mortgage would stay above water. Meanwhile, the demand for MBS was so great that issuers began stuffing their underlying portfolios with lousy mortgage loans. Once the subprime mortgage lenders had a way to sell their risky debt, they began to market even more aggressively to high-risk borrowers. Wall Street would sweep up these subprime loans, package them with other loans of varying quality, and sell pieces of them to investors. And the most insidious aspect of this process was that these bundles of risky loans were labeled investment grade (‘A’ rated or higher) by the rating agencies, which in turn were earning big fees from the issuers.

Most people know the rest of the story. By the middle of 2006, the housing market had begun to stall out. As things deteriorated and sales and prices dropped, the number of defaults in residential loans increased. In the end, MBS halted or reduced payments and essentially became unmarketable.

The new legal action by the State of New York is the first taken against a major bank by the Residential Mortgage-Backed Securities Working Group, a body appointed by Congress to investigate Wall Street misconduct in the lead-up to, and during, the financial crisis of 2008 and 2009. The New York complaint reads in part, “At the heart of [the bank's] fraud was the failure to [take] a variety of steps to ensure the quality of the loans underlying their [mortgage-backed securities], including checking to confirm that those loans … were extended to borrowers who demonstrated the willingness and ability to repay.”

The complaint also states that in 2006 and 2007 alone, investors took losses of $22.5 billion on mortgage-backed securities that Bear Stearns underwrote. At one point, Bear Stearns signed off on 11 per cent of the country’s total.

Since then the credit rating of those securities has been slashed, leaving them in “junk bond” territory or effectively worthless.

Suits similar to the JP Morgan Chase lawsuit will be brought against other investment banks in the near future. We urge you again to be vigilant in protecting your rights. Time limitations with respect to asset-backed securities are beginning to bar claims. If you bought an MBS from any company, you need to act soon. Contact us through our online form or e-mail us at [email protected], or call us at 216-781-5515 or toll free at 877-215-0593.

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