Allstate sues JPMorgan Chase over sale of toxic loans

Written by Biloxi

This is the second lawsuit by Allstate to sue a major bank over sales of toxic loans. Last year, Allstate sued Bank of America and eighteen other defendants including several former Countrywide officials and ex-CEO Angelo Mozillo. According to the complaint, Allstate, alleged that Countrywide officials misled  the company into believing the mortgage-backed securities it bought were safe, and the company suffered on more than $700 million of mortgage debt that it bought from Countywide. Allstate used sampling to prove and confirm that Countrywide lied to Allstate when the selling mortgages.

Now, Allstate has sued JP Morgan Chase and subsidiaries Bear Stearns and Washington Mutual for fraudulently selling the company more than $750 million in residential mortgage-backed securities (RMBS) backed by toxic loans. Like the Countrywide lawsuit, Allstate used sampling to prove its case against JP Morgan Chase according to the lawsuit:

Allstate selected a random sample of loans from each offering in which it invested to test Defendants’ representations on a loan-level basis. Using techniques and methodologies that only recently became available, Allstate conducted loan-level analyses on nearly 26,809 mortgage loans underlying its Certificates, across 17 of the offerings at issue here.

For each offering, Allstate attempted to analyze 800 defaulted loans and 800 randomly-sampled loans from within the collateral pool. These sample sizes are more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loans’ characteristics. Analyzing data for each Mortgage Loan in each Offering would have been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private businesses. As the size of a sample increases, the reliability of its estimations of the total population’s characteristics increase as well. Experts in RMBS cases have found that a sample size of just 400 loans can provide statistically significant data, regardless of the size of the actual loan pool, because it is unlikely that such a sample would yield results markedly different from results for the entire population.

In a nutshell from the lawsuit, Allstate summarizes that JP Morgan Chase lied:

the disclosed underwriting standards were systematically ignored in originating or otherwise acquiring non-compliant loans. For instance, recent reviews of the loan files underlying some of Allstate’s Certificates reveal a pervasive lack of proper documentation, facially absurd (yet unchecked) claims about the borrower’s purported income, and the routine disregard of purported underwriting guidelines. Based on data compiled from third-party due diligence firms, the federal Financial Crisis Inquiry Commission (“FCIC”) noted in its January 2011 report:

The Commission concludes that firms securitizing mortgages failed to perform adequate due diligence on the mortgages they purchased and at times knowingly waived compliance with underwriting standards. Potential investors were not fully informed or were misled about the poor quality of the mortgages contained in some mortgage-related securities. These problems appear to be significant.

The good news is that this new bombshell gives the green light for any company who believes that the banks or its predecessor was dishonest in representing any and all deal components, and wishes to use statistical sampling to prove its case. The bad news for banks is that they inherited its predecessor or predecessor's toxic mortgages which left the banks holding the bag.