CNBC: JPMorgan Settlement Could Stifle Housing Market

Thursday, 24 Oct 2013 07:54 AM

By Michelle Smith

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With the proposed settlement between the Justice Department and JPMorgan Chase, many people may rejoice, initially, until they witness the impact on the housing market, financial professionals tell CNBC.

Consumers have long expressed anger at big banks as they criticize the government for failing to punish those responsible for the financial crisis. The Justice Department now seems determined to make an example of JPMorgan Chase. But if regulators tap the firm for a multi-billion dollar settlement that could stifle lending in the housing market, some warn.

"In my eyes, this tightens credit. That is the problem with these government actions to make everyone pay," Paul Miller of FBR told CNBC.

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"The bottom line is that there is nothing in the market these days suggesting now is the time to significantly ease underwriting standards," Guy Cecala, CEO at Inside Mortgage Finance, told CNBC.

"A combination of big settlements, new mortgage regulations and continuing GSE [Fannie Mae and Freddie Mac] buyback risk all indicate any easing of underwriting will be slow," said Cecala. "The only factor really pushing for looser underwriting is declining mortgage originations and the resulting increase in competition. But it seems to be happening very slowly."

Last week, the Federal Housing Administration, which insures low-down payment loans, tightened its borrowing restrictions. And on Jan. 1, new lending regulations will apply, forcing banks to tighten up again.

Some expect banks to view the mortgage market as an increasingly risky place to play, especially when considering the circumstances of the JPMorgan case. The government claims to be pursuing justice, but in the eyes of some it's obvious it is a severe game of cutthroat.

During the financial crisis, the government urged JPMorgan to take over Bear Stearns, a highly troubled bank. According to The Washington Post, Bear Stearns was one of the biggest players in the business of peddling subprime mortgage backed securities, which were toxic assets that played a major role in the financial crisis.

Granted, JPMorgan did not have to acquire Bear Stearns, but The Post says the government wanted the deal to happen badly enough that the Federal Reserve put up money to facilitate the transaction. JPMorgan also acquired Washington Mutual, another distressed financial firm.

By some estimates 70 to 80 percent of the wrongdoing at the heart of the Justice Department settlement was by the acquired companies before they were acquired by JPMorgan, according to The Post.

"This is just going to make banks more conservative," Jaret Seiberg of Guggenheim Securities told CNBC.

"If they're going to go after you for helping the government out in taking over distressed institutions in time of crisis, then why do you have any confidence that they're not going to go after you for some technical violations of the dozens of new rules coming down?" he added.

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Related Stories:

Morici: AG 'Shaking Down' JPMorgan

Former BofA Exec: JPMorgan Penalties Will Make Banks Reluctant to Help in Crises

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