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Washington Mutual Inc. – acquired by JPMorgan Chase & Co. (JPM - Analyst Report) in 2008 – and Citigroup, Inc. (C - Analyst Report) are encountering legal charges in connection with issues arising out of the sale of mortgage-backed securities (MBS). Integer Program LLC sued these two firms for incurring huge losses from mortgage loans.

Integer has accused Washington Mutual and Citi of breaching an agreement related to mortgage loan purchase entered by these two institutions in 2007. As a result of this agreement, Integer incurred a total loss exceeding $301 million.

As per the lawsuit filed by Integer, residential mortgage loans, in excess of 4600, were securitized by Washington Mutual. Consequently, these mortgage-backed securities were sold to Integer. Of these, the alleged breaches took place on over 1,400 loans.

Prior to the closing of the offer date of the certificates to the public, more than 60 mortgage loans were delinquent. Further, it is alleged that both JPMorgan and Citi were well aware of the associated risks. However, despite being acquainted with the existing breaches in the securities, JPMorgan and Citi did not take any steps to rectify them.

Similar Charges Earlier

Earlier in 2013, JPMorgan was sued by National Credit Union Administration (NCUA), the U.S. regulator for credit unions, for misrepresentation in the underwriting and sale of MBS worth over $2.2 billion, which were sold to the U.S. Central, Western Corporate and Southwest Corporate federal credit unions (FCUs) by Washington Mutual.

Further, many other global giants, including Morgan Stanley (MS - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report), are battling similar lawsuits related to MBS.

Our Viewpoint

Such charges are expected to result in increased legal risks, which might pose a threat to the companies’ financials going forward. Moreover, it is apprehended that litigation overhangs might tarnish the image of these banking majors.

JPMorgan currently carries a Zacks Rank #2 (Buy), while Citi carries a Zacks Rank #3 (Hold).

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