General Electric has set aside $1.5 billion to cover potential fines in a Justice Department probe of high-risk mortgages handled by its lending business before the 2008 financial crisis.
The move followed settlements talks with Justice in March, and GE based the amount in part on past government assessments against other lenders, Chief Financial Officer Jamie Miller said on a quarterly earnings call Friday. The Boston-based company learned that investigators were looking into GE Capital and its WMC subsidiary in December 2015, and Justice subsequently served the company with subpoenas.
GE “has been working for several years to resolve WMC-related exposures,” CEO John Flannery said. The company explained earlier this year that it expected the department to claim WMC violated a 1989 finance law through the origination and sale of so-called subprime loans that were packaged into mortgage-backed securities from 2005 through 2007.
Such securities, which enabled lenders to book profits from home loans immediately while insulating themselves from the risk of borrower defaults, were at the heart of the 2008 financial crisis. The U.S. mortgage market surged to about $15 trillion as lending standards loosened due to the securities, but when housing prices began to tumble in 2006, borrowers found themselves unable to repay the loans or refinance at lower rates, and the notes proved impossible to value.
That led to the failure of investment bank Lehman Brothers in September 2008, froze global credit markets, and forced the U.S. to pour billions of dollars into bailouts to shore up the financial system.
GE completed the sale of WMC in December 2007, a transaction it said at the time was prompted by “pressures in the U.S. subprime mortgage industry.”
