Today we published a story about how JPMorgan Chase used other people’s money to pay off penalties assessed for the mortgage-related fraud that contributed to the 2008 financial crisis. The bank forgave numerous loans that it had sold years earlier, and then used those cancellations to receive credit under a pair of settlements with state and federal prosecutors. (JPMorgan declined to comment on this story.)
The revelation comes out of two lawsuits filed by one of the purchasers of JPMorgan Chase’s loans, Larry Schneider, an investor from Boca Raton, Florida. And the narrative Schneider offers for how he wound up in this fight, if accurate, provides a new window into how Chase treats the people it does business with. The first-person account calls to mind Bernie Sanders’s famous assertion that “the business model of Wall Street is fraud.”
Initially, Schneider had a decent relationship with JPMorgan Chase. From 2003 to 2008, S&A Capital Partners, one of Schneider’s three companies, bought 531 mortgages from Chase for less than face value. Schneider then worked out new repayment terms, allowing borrowers to stay in their homes. By being flexible and dealing with homeowners directly, Schneider was able to create a business that worked for him—and his clients. “We ask borrowers what day of the month they’re able to make a payment,” he said in an interview. “We’re able to create stability for the borrower and help their credit.”
Schneider reports no significant problems in working with Chase during this period. But near the end of 2008, as the financial crisis raged, Schneider’s Chase contact, Eddie Guerrero, showed him a bulk spreadsheet of over 6,000 mortgages. Guerrero said these were primary mortgages (known as “first liens”) that had been delinquent for over 180 days, located in the hardest-hit areas of the country. He told Schneider that the bank no longer found it viable to hold onto these properties. Instead, the “highest levels of management” simply wanted to get rid of the mortgages.
Guerrero sent a data tape for Schneider to scrutinize. Schneider’s first hint that something was off was when he found properties on the list that JPMorgan had already sold him. Guerrero apologized, claiming his team had made a mistake.
Overall, the tape was a mess, lacking borrower names, property addresses, even the payment history or amounts due. That’s because these were loans Chase had stuffed into the Recovery One (RCV1) database, a toxic-waste dump for defaulted mortgages Chase had no hope of resurrecting.
On RCV1 loans, Chase ostensibly didn’t follow any federal requirements for servicing mortgages, like giving borrowers the chance to pay off past-due amounts. The RCV1 loans were “charged-off,” a legal term allowing Chase to collect default insurance, and sent out to third-party collection agencies, which then attempted to squeeze whatever cash they could out of the borrowers. Specific information about the loans was not retained.
Guerrero promised Schneider several times that he would deliver the full data on the mortgages. Behind the scenes, employees at Chase were scrambling to patch up the information. According to an internal e-mail quoted in one of the lawsuits, Guerrero asked JPMorgan Chase colleagues, “Do we have a list that contains the entire collateral address or can we bump this list up against something to fill in the street address?”
Guerrero enticed Schneider by highlighting valuable, erroneously charged-off loans—“cherries,” he called them—hidden in the database. A few cherries could recoup whatever Schneider paid for the loans all by themselves. Guerrero also promised future benefits if Schneider helped Chase out. “This is an important issue for the way higher ups, so it makes me look like a hero and should help you get some good deals too,” Guerrero wrote Schneider on November 6, 2008. He was pushing for a sale by the end of the year to keep the RCV1 loans off Chase’s 2009 books.
Schneider considered Guerrero a friend. “I never had a problem with him in 1,000 transactions,” he said. And he was able to confirm that there were some “cherries,” mortgages with balances of $500,000 or more located in good neighborhoods. But Schneider was busy with another major loan purchase with HSBC, so he turned down the offer.
Guerrero then pitched Schneider a bargain-basement deal: $200,000 for approximately $100 million in mortgages. It was so trifling—two-tenths of a penny on the dollar—that Schneider couldn’t help but bite. Oddly enough, by the time Schneider made the deal (through a separate company, Mortgage Resolution Services), the Mortgage Loan Purchase Agreement included 3,529 loans initially worth $156 million, a 56 percent upsell for no additional cost.
But Schneider wasn’t getting what he asked for. Chase stated the loans were primary mortgages; but Schneider claims that significant numbers of them were home-equity loans or “deficiency judgments,” overdue balances on loans already put into foreclosure. Deficiency judgments are not even mortgages; there’s no property to secure as collateral if the debt isn’t repaid. Numerous properties, in fact, were occupied by whoever bought them after Chase foreclosed.
Chase also said it owned all the loans and had the right to transfer them to Schneider. But many of them, according to an internal October 2008 spreadsheet cited in one of the lawsuits, were owned by other investors. Chase was selling loans it didn’t own to a third party. Plus, Chase promised in the purchase agreement that “each Mortgage Loan complies…with all applicable federal, state, or local laws.” But the RCV1 loans were not being serviced according to Schneider, and therefore weren’t compliant. “They took everything that was a liability or a fraud and just threw it in there,” he said.
After the sale, Schneider never got the complete loan data, including the key documents required to prove ownership. His company painstakingly recreated loan information through cold calls and public-records searches. But it were severely hampered in doing anything with the properties without the documents.
As a final insult, Chase told Schneider in March 2009 that it was recalling $6 million in loans that were included by mistake. These were the cherries. Schneider saw it as a bait-and-switch: Chase hooked him with some valuable loans intermingled with the dreck, and then took the good stuff away. The purchase agreement prohibited pulling back any loans after the sale, but since Schneider hadn’t yet received the full loan information, there was no way for him to claim possession. “I really didn’t have any recourse,” he said.
Chase never stopped trying to collect on these loans. Both Chase and third-party debt collectors acting on its behalf deluged borrowers of Schneider’s loans with letters asking for payments.
A series of letters to a Mr. Fred Allen Frederick of San Antonio, Texas, on a loan Schneider purportedly bought, serves as a good example. “We know you struggled to make your mortgage payments,” Chase wrote Frederick on January 21, 2015. “Together, we can find a solution.” By July 2015, Chase was advising Frederick about “new options when it comes to your mortgage debt,” including a repayment plan to “pay off the amount over time.” His account balance had somehow shrunk. But in a September 2016 letter, Chase was still hoping to work out a solution with “a new team” assigned to the debt. Even by May of this year, Chase was soliciting Frederick, stating that “we may be able to settle for less than you owe.”
These letters look somewhat suspicious even before you learn that Chase didn’t even seem to own Frederick’s loan anymore. Think of all the different revenue streams JPMorgan Chase managed from these same toxic loans. It took the $200,000 from Schneider, borrower payments intended for the owner but routed to and held by Chase, payments from insurance carriers on the defaulted properties, and whatever money eked out from debt collection. And then, as we detail, when mortgage settlements required Chase to provide consumer relief for homeowners, it likely used many of these same loans sold to Schneider and other investors, forgiving them and taking credit toward its penalty.
We can’t say whether Chase treats all of its clients the way it appears to have treated Larry Schneider. But in 2012, former Goldman Sachs manager Greg Smith explained how modern bank culture mostly involves determining new and exciting ways to rip off clients. That’s certainly how these allegations feel. Chase reportedly used Schneider to dump off its legal exposures, then changed the terms of the deal after the fact to maximize profits. Schneider managed to be one of the few investors with the means and determination to fight back; he’s four years into these cases. But what about all the Chase customers who don’t have that ability?
“I’ve dedicated the last six or so years of my life, in pursuit of justice,” Schneider said to me. “I have a moral obligation to never give up and never give in.”