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Dive Brief:
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Wells Fargo sued JPMorgan Chase on Monday, accusing the country’s biggest bank of failing to conduct due diligence on a $481 million commercial real estate loan.
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San Francisco-based Wells, serving as the trustee for investors in the loan, said JPMorgan originated the mortgage loan for New York-based real estate development firm Chetrit Group in 2019 “based on financial information that both JPM and the Chetrits knew to be false and dramatically inflated,” according to the lawsuit, filed Monday in U.S. District Court for the Southern District of New York.
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New York City-based JPMorgan quickly offloaded risk to the trust, “taking home millions of dollars of fees in the process,” Wells said in its complaint. “The value of the Properties backing the Mortgage Loan then collapsed — leaving the Trust with tens of millions of dollars in losses.”
Dive Insight:
When the Chetrit Group turned to JPMorgan for financing for its acquisition of a multifamily properties portfolio that included 43 properties across 10 states, the two discovered that the seller, Bloomfield Hills, Michigan-based ROCO Real Estate, provided fraudulent financial statements and “massively overstated” the historical net operating income of the properties, by 25%, according to the lawsuit.
Instead of demanding accurate financial data, JPMorgan proceeded – providing a $481 million mortgage loan for the $522 million purchase – using the overstated information to market the mortgage loan to trust investors and sharing the same inaccurate data to an appraisal firm, the complaint contended.
JPMorgan didn’t bear the associated risk itself because it never intended to hold the loan after originating it, Wells said. “Instead, it immediately transferred the risk of the Mortgage Loan to the Trust and its investors, who were left in the dark about the fraudulent NOI that anchored, among other things, the anticipated cash flow and appraisals of the Properties that JPM showed them before they invested.”
But JPMorgan collected millions of dollars in fees for originating the loan and selling certificates the trust issued, the complaint said. The high-profile transaction was “quarterbacked” by JPMorgan’s head of real estate loan origination for the U.S., Joseph Geoghan, according to the complaint.
Wells contends JPMorgan knew the information was inaccurate five months before originating the loan. A JPMorgan analyst responsible for due diligence on the properties “described financial reporting provided by the Borrower in text messages to a colleague as ‘made up’ and ‘ridic[ulous],’” the complaint said.