The history of SACO 2006-8, as told through court documents dating back more than six years, provides a view into how the mortgage-backed security industry was built up and spectacularly collapsed. For JPMorgan, it has become the mortgage-backed security from hell.
Last week, JPMorgan Chase's costly legal troubles took another step toward completion when trustees for 311 mortgage-backed securities sold by the bank or inherited through acquisitions prior to the financial crisis agreed to a $4.5 billion settlement. Another 14 got an extension to still consider the deal, while five trusts wholly rejected the settlement, leaving open the option for them to continue litigation against the bank. SACO 2006-8, created and marketed by Bear Stearns two years prior to its government-supported acquisition by JPMorgan in 2008, was one of the trusts that rejected the deal.
Th detailed history of this one trust's creation and sale, as told through court documents dating back to a lawsuit filed by the bond insurer Ambac six years ago, provides a view into how the mortgage-backed security industry was built up and spectacularly collapsed. And it may be one of the very few chances that the investors who bought these securities — and the insurance companies that guaranteed them — can find out what actually happened.
More importantly, it may be the only chance left for the public to get a granular view of what actually happened in the run-up to the financial crisis.
The Associated Press
The best way to understand the importance of SACO 2006-8 to both the inner workings of the mortgage-backed securities industry and JPMorgan is to start in the present and travel back to the past.
A large chunk of JPMorgan's more than $20 billion legal tab last year over the bank and its affiliates' practices in marketing and selling mortgage-backed securities before the financial crisis is owed to two settlements: one with the Department of Justice for $13 billion and the previously mentioned $4.5 billion deal. (The latter deal still requires approved by a judge, and if granted will finally remove the bulk of financial crisis-era legal liabilities from the bank.) The combined $17.5 billion cost of those two settlements, reached less than a week apart, nearly matched JPMorgan's net income of $17.9 billion last year.
The settlement included a statement of facts that JPMorgan agreed to — not a guilty plea — describing generally how its employees (and those of Bear Stearns and Washington Mutual) marketed mortgage-backed securities to investors even though some of the loans didn't comply with the loan underwriters' own guidelines for selling and securitizing them. The civil penalty of $2 billion only applied to what JPMorgan did before the crisis, not Bear Stearns or Washington Mutual, and released the bank from civil liability for claims arising from the securities included in the settlement.
"Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown," Attorney General Eric Holder said when announcing the deal between the Justice Department, several states, and other regulatory agencies and JPMorgan, which ranks as the country's largest bank by assets.
JPMorgan's chairman and Chief Executive Officer Jamie Dimon described 2013 in a letter to investors as "the best of times [and] the worst of times," and said that the bank came through "scarred but strengthened — steadfast in our commitment to do the best we can."
Many of the same mortgage-backed securities covered by the Justice Department deal were also among those included in the $4.5 billion trustee settlement, SACO 2006-8 being one of them.
"We believe the acceptance by the Trustees of the overwhelming majority of the 330 trusts is a significant step toward finalizing the settlement," a JPMorgan spokesman said in a statement earlier this month. The spokesman declined further comment for this story.
SACO 2006-8 was one of many mortgage-backed securities pumped out by Bear Stearns during the housing and credit boom. Made up of almost 5,300 home equity lines of credit from California, Virginia, Florida, and Illinois acquired by a Bear subsidiary called EMC, the trust had a principal balance of $356 million. Its most senior notes, the "Class A Notes" that would get paid off first by the stream of home equity payments, got the highest possible ratings from Moody's and Standard & Poor's, and were buoyed by an insurance policy from the AAA-rated Wisconsin-based bond insurer Ambac that guaranteed payments on the senior debt.
Almost a third of the home equity lines came from American Home Mortgage Corporation, which would declare bankruptcy less than a year later — not coincidentally, the same year home equity origination would peak. By March 2008, Bear Stearns would be acquired by JPMorgan after its stock plummeted as clients and investors got nervous about its mortgage-backed securities holdings. Two years and a few months later, in November 2010, Ambac would file for bankruptcy.
But SACO 2006-8 continued to live. It would be quickly downgraded and, by the end of 2010, it had already experienced some $141 million worth of losses and had 41% of its loans go delinquent or charged off entirely.
U.S. Attorney General Eric Holder
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