A reported, developing settlement between mortgage securities investors and JP Morgan — separate from the $13 billion mortgage settlement recently announced — would be more generous to bondholders than a similar deal by Countrywide if the bonds covered are restricted to those targeted by law firm Gibbs and Bruns, according to Barclays analysts.

News reports said that talks have pegged the deal at $5.75 billion. The settlement would compensate bondholders for breaches of representations and warranties in residential mortgage backed deals (RMBS) issued by JPM, Bear Stearns and Washington Mutual before the crisis.  

Barclays believes that if such a deal exists it is the result of efforts by Gibbs and Bruns, which had issued instruction to a number of trustees overseeing 243 deals issued by JPM, Bear and WAMU to open investigations of rep and warranty breaches.

If the $5.75 billion deal does indeed cover the list collected by the law firm, then it would be significantly more generous to investors than a similar deal for holders of RMBS issued by Countrywide. By Barclays’ account, the payout would amount to about 12.8% of losses on the transactions compared to 10.5% for Countrywide investors.

On the other hand, if the entire universe of RMBS issued by JPM, Bear and WAMU in 2005 and 2007 were covered by the settlement, then the payout would be significantly lower, at about 6% of losses.

As it stands, the $13 billion settlement by JPM is understood to involve a $3 billion payout to bondholders and $4 billion in consumer aid.

Barclays sees a limited impact from the $3 billion, predicting that most likely scenario is that only those who relied on offering documents would be able to collect on this claim. This basically means only the original purchasers stand to gain. The $3 billion equals about 0.75% of the original balance of private label deals issued by the three entities in 2005-2007.

For the $4 billion aid portion, Barclays says that the approach will likely resemble that of the AG National Mortgage Servicing Settlement, which gave banks partial credit for cutting the balances on loans owned by non-agency trusts. This would obviously hit bondholders. JP Morgan could compensate trusts for the shortfall but it is not clear that it would. At any rate, Barclays forecasts an increase in modifications and short sales among mortgages in the affected deals.

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