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Wall St. Journal: What J.P. Morgan’s $13 Bln Settlement Means for Neighborhoods, Struggling Homeowners

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Wall Street Journal: Market Watch

The government wants J.P. Morgan Chase & Co., chastened by this week’s record-breaking settlement with the Justice Department, to focus on helping borrowers and neighborhoods that are struggling the most.

Under the terms of the settlement, reached Tuesday after weeks of tense deal making between the bank and the government, J.P. Morgan has until the end of 2017 to spend $4 billion in “consumer relief.”

The bank can get credit for modifying mortgages for struggling homeowners, tearing down dilapidated properties and donating foreclosed houses to nonprofits, among other measures. Some of the terms are similar to those in the national mortgage settlement, which was reached last year between government agencies and five banks including J.P. Morgan.

Also similar to the national mortgage settlement, an independent monitor will determine when J.P. Morgan has satisfied the settlement’s obligations. The bank says it expects to wrap up the obligations by the end of 2016, a year ahead of schedule.

Not all the details of the deal were clear this week, but it appeared to be aimed at giving J.P. Morgan the most credit for helping the hardest-hit areas, rather than telling J.P. Morgan exactly where to spend the money. Though it covers many parties, it’s aimed mostly at struggling homeowners whose mortgages are serviced by J.P. Morgan.

The agreement is also mindful of the fact that foreclosures and bad mortgage loans hurt not just the homeowners who are directly affected, but also the neighbors whose property values fall or whose neighborhoods are destabilized as a result, observers said after reviewing the deal.

In some ways it differs from a (much smaller) June agreement between Wells Fargo & Co. and the Department of Housing and Urban Development, or HUD. That agreement was also focused on helping communities most damaged by foreclosures. But it specified the cities that Wells Fargo had to invest in, including Grand Rapids, Mich., and Prince George’s County, Md.

HUD was not a party to the J.P. Morgan settlement, but it advised on the negotiations.

Here’s a closer look at who might be helped by J.P. Morgan’s $4 billion in consumer relief.

– Struggling borrowers in struggling areas. J.P. Morgan will get credit for lending to low- and moderate-income borrowers in certain areas, including places declared as major disasters by the Federal Emergency Management Agency between Oct. 1, 2012, and Nov. 19 of this year. (FEMA lists them here.) It also gets credit for lending in areas that HUD has classified as “hardest hit” because of especially high unemployment or especially steep drops in home prices. The bank will also get credit for lending to borrowers who lost their homes to foreclosure or short sales.

The Justice Department agreement says the borrowers must be “credit worthy” – it doesn’t want loans being foisted on people who can’t afford them because, well, that was a big cause of the 2008 financial crisis, after all.

– Struggling homeowners whose mortgages are serviced by J.P. Morgan. The bank will get credit for forgiving part of the mortgage bill for borrowers who are behind on their payments and underwater – meaning the house’s value has dropped so much, they owe more on their house than it’s worth. The bank will also get credit for forbearance – basically, delaying a foreclosure – for delinquent, underwater mortgage loans that don’t qualify for principal forgiveness. (Mortgage loans owned by Fannie and Freddie, for example, can’t have their loan balances cut.)

The bank will also get credit for cutting interest rates for borrowers who are behind on their mortgages, or are at imminent risk of falling behind, even if they aren’t underwater.

– Struggling borrowers whose mortgage servicers don’t participate in HARP. Homeowners who are underwater, but with mortgages serviced by companies that don’t participate in the government’s Home Affordable Refinance Program, are extremely unlikely to qualify for a refinance on their own. J.P. Morgan will get credit for taking on those customers and refinancing them into lower rates.

– Housing nonprofits and land banks. J.P. Morgan will get credit for donating mortgages or bank-owned homes (basically, foreclosed homes) to nonprofits with missions like keeping people in their homes, as well as “land banks,” which turn around bank-owned properties.

– Hard-hit neighborhoods. J.P. Morgan will also get credit for demolishing dilapidated properties and donating to community redevelopment groups.

– Military personnel. The bank will get credit for donating mortgages or bank-owned homes to military service members with disabilities or relatives of deceased service members.

In the settlement, the largest ever between the U.S. government and a single company, the government accused J.P. Morgan of misleading investors about the quality of mortgage loans it was bundling and selling. The government’s “Statement of Facts,” which J.P. Morgan signed off on, described an atmosphere where bank employees sold loans even if they had suspect appraisals or missing paperwork, without informing the investors who were buying the loans.

The fact that a settlement over securities sold to investors included help for consumers was a clear acknowledgement, community groups said, that bad behavior on Wall Street trickles down to Main Street. The Justice Department said that the consumer relief portion of the settlement was meant to help “consumers harmed by the unlawful conduct” of J.P. Morgan and two companies it bought in 2008, Bear Stearns and Washington Mutual.

Josh Zinner, co-director of the New Economy Project, which works on economic justice issues in New York City, called the $4 billion not a full vindication but “a good start.”

“It’s a large amount,” Zinner said. “But it’s still a drop in the bucket related to the harm done and the size and profitability of Chase.”

J.P. Morgan earned about $20 billion in 2012. It has made about $12 billion in the first nine months of this year, though it recorded a third-quarter loss because of legal charges.