JPMorgan Chase & Co.
(
JPM
) may find itself in trouble as a Manhattan Federal Judge ruled
against it in a lawsuit related to losses on securities driven by
risky equity home loans. Syncora Guarantee Inc., a wing of
Syncora Holdings Ltd
. (
SYCRF
), had filed the lawsuit against JPMorgan's EMC Mortgage Corp
unit.
Syncora had alleged that the violations of warranties by EMC
triggered the underlying loans to default. According to the U.S
district judge, Syncora need not substantiate its allegations in
order to claim liability of banks in bearing the losses.
Moreover, the court favored Syncora by stating that the
defendant can establish a material breach of contract by presenting
the infringement of representations and warranties by EMC, which
lead to a significant appreciation in material risk.
Syncora had alleged EMC of providing misleading information
prior to signing of the agreement relating to insuring
interest and principal repayments pertaining to $666 million bond
created in 2007 which were supported by 9,871 equity home loans.
Consequently, Syncora has shelled out more than $168.6 million in
settling claims and consistently facing incremental material risk.
However, the judge has denied equitable relief to Syncora.
From the viewpoint of the bond insurers, the court ruling could
help them breathe a sigh of relief, as now the banks would become
liable for the losses associated with sub prime and other perilous
loans. Several insurance companies like
Assured Guaranty Ltd.
(
AGO
) and
MBIA Inc.
(
MBI
) are set to gain from the favorable court decision, which grants
bond investors special preference because of their distinct legal
interests as against the general investors.
Earlier, this year, Supreme Court of New York had ruled out a
similar decision in favor of MBIA, which had sued Countrywide
Financial, a unit of
Bank of America Corporation
(
BAC
). MBIA has accused Countrywide for fraudulently inducing it to
insure precarious mortgage backed securities worth $20 billion by
providing misleading statements.
Conclusion
If JPMorgan repurchases risky loans due to legal pressure, its
credit quality might deteriorate to an extent in the near term.
JPMorgan is facing a deluge of lawsuits, elevated legal expenses
and compensations for quite sometime now. These will severely
affect its financials as well as its reputation. Moreover, with
regulatory authorities cracking down hard on unwarranted activities
of the banks, they need to overcome their dubious practices for
their own good.
Currently, JPMorgan retains a Zacks #4 Rank, which translates
into a short-term Sell rating. Considering the fundamentals, we
also maintain a long-term Neutral recommendation on the stock.
ASSURED GUARNTY (AGO): Free Stock Analysis
Report
BANK OF AMER CP (BAC): Free Stock Analysis
Report
JPMORGAN CHASE (JPM): Free Stock Analysis
Report
MBIA INC (MBI): Free Stock Analysis Report
SYNCORA HOLDNGS (SYCRF): Free Stock Analysis
Report
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