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.