Wells Fargo Sues JPMorgan Chase Over Real Estate Loan

Wells Fargo reportedly sued JPMorgan Chase on Monday (March 10), alleging that the bank knowingly made a loan based on faulty numbers, knowing that the loan would later be sold off in pieces to investors.

In its lawsuit, Wells Fargo seeks to recover losses for investors, Reuters reported Monday.

Reached by PYMNTS, JPMorgan Chase declined to comment on the report.

The case involves a $481 million commercial real estate loan made in 2019, according to the report.

Wells Fargo alleges that JPMorgan Chase learned before the purchase closed that the seller had overstated the property’s historical net operating income by 25% but went ahead with the loan because parts of it would be sold to investors, the report said.

When the borrower defaulted in 2022, investors lost tens of millions of dollars, per the report.

With its lawsuit, Wells Fargo aims to force JPMorgan Chase to repurchase the loan or pay damages for breach of contract, according to the report.

It was reported in November that double commercial property loan defaults were at their highest point in 10 years.

This situation raised worries that a lending practice known as “extend and pretending” was masking an increasing system risk and that the increase in loan modification was distorting loan markets.

In October, the New York Federal Reserve warned that lenders seemed in many cases to be offering breaks to property borrowers for the sole purpose of delaying a write-off.

“Banks’ ‘extended-and-pretended’ their impaired commercial real estate mortgages in the post-pandemic period,” the central bank’s researchers wrote, cautioning that generous modifications could lead “to credit misallocation and a build-up of financial fragility.”

In April, it was reported that banks were facing a $2 trillion “wall” of property debt and must reduce their exposure to commercial real estate as that debt comes due.

“Banks will be under pressure,” Newmark CEO Barry Gosin told the Financial Times (FT) in an interview posted April 1.

Newmark, a real estate advisory and brokerage company, said at the time that the estimated $2 trillion of U.S. commercial real estate debt maturing between then and 2026 would have to be refinanced at much higher interest rates.