Reporting Profits, J.P. Morgan Sets Aside $1.3 Billion for Foreclosure Fraud Legal Costs

Today, J.P. Morgan Chase revealed that it made a third-quarter profit of $4.4 billion, despite dwindling revenues. The bank set aside far less money — $6.6 billion, or 67 percent, less than it did at the same time last year — to cover losses on things like mortgages and credit cards.

But the outlook looks grim for the bank — and especially when it comes to mortgages. This afternoon, about 40 state attorneys general are set to announce a joint investigation into widespread foreclosure fraud. Some analysts argue that the scandal could engulf every mortgage securitized — that is, bundled and sold to investors — in the last seven years. All in all, the crisis could cost banks tens of billions.

And J.P. Morgan’s statement reveals it is battening down the hatches. The company said it has set aside an extra $1.3 billion for possible legal costs. It also said it is carefully reviewing 115,000 mortgage affidavits in an earnings call. (CEO Jamie Dimon tried to reassure call participants by saying there is “almost no chance we made a mistake” with foreclosures.) And it revealed that it increased its mortgage-repurchase reserves by $1 billion. The bank uses that money, now more than $3 billion, to buy back bad mortgages it packaged and sold to investors or the government-sponsored entities, Fannie Mae and Freddie Mac. (Often, the investor makes the bank buy the mortgage back because the documents are faulty.)

That implies J.P. Morgan alone is preparing for a multi-billion-dollar fallout. Watch for other banks to do the same when they reveal their third-quarter earnings, this week and next.