JP Morgan Chase has agreed to a $US13 billion settlement with the US government for selling bad loans that helped trigger the mortgage meltdown in 2008.

And it may not be over for the bank, with criminal charges expected to be laid against executives.

The behaviour that the largest US bank admitted to, US authorities said, is at the heart of what inflated the housing bubble: lenders making bad mortgages and selling them to investors who thought they were safe.

When the loans started turning bad, investors lost faith in the banking system, and a housing crisis turned into a financial crisis.

The civil settlement marks the end of weeks of tense negotiations between JP Morgan Chase, which is looking to move past the legal issues that have plagued it for more than a year, and the US government, which is under pressure to hold banks accountable for behaviour that led to the financial crisis.

JP Morgan said it has set aside all the funds it needs to cover the settlement, meaning the deal will have no impact on its earnings.

The bank said last month it had set aside $US23 billion to cover litigation expenses.

JP Morgan’s shares rose 0.7 per cent to close at $US56.15.

But even after the settlement, the bank faces at least nine other government probes, covering everything from its hiring practices in China to whether it manipulated the Libor benchmark interest rate.

At issue in the settlement was the long chain of parties between the original mortgage lender and the ultimate investor in the loan.

Often smaller lenders would make a mortgage loan, and sell it to a bank, which would package loans into bonds, and in turn sell them to investors.

This chain  allowed capital to flow to loans that arguably should never have been made.

“Without a doubt, the conduct uncovered in this investigation helped sow the seeds of the mortgage meltdown,” US Attorney General Eric Holder said in a statement.

The investors that bought these mortgage bonds demanded that  the loans be of a particular quality. JP Morgan said the loans met the guidelines, but one of its employees said they did not, the bank admitted.

Due diligence firms that reviewed some of those loans for JP Morgan in 2006 and 2007 said that 27 percent of them did not meet underwriting guidelines, but the bank still packaged at least half of those into mortgage securities, the government said.

Several deals rolled into one

The government called the settlement the largest in US history, but the deal is really several rolled into one.

It includes a $US4 billion relief package with US Department of  Housing and Urban Development, and a $US4 billion settlement with  the Federal Housing Finance Agency, which oversees government mortgage financing companies Fannie Mae and Freddie Mac.

Of the $US4 billion settlement with HUD, at least $US1.5 billion will go toward loans the bank is forgiving.

As much as $5US00 million will go to change the terms of loans to lower monthly  payments.

The remaining $US2 billion will be for assorted purposes, including new loans for low- and moderate-income borrowers in areas that have been hard-hit by the housing crisis and for  demolition of abandoned homes.

Tough negotiations

JP Morgan and government agencies led by the Justice Department reached a tentative agreement in mid-October and have been hammering out details since then. New York Attorney General Eric Schneiderman was also involved in discussions.

JP Morgan’s negotiations with the Justice Department began in earnest last spring, after Justice Department lawyers in California preliminarily concluded that the bank had violated US civil laws.

The Justice Department had looked into mortgage  bonds the bank sold from 2005 through 2007, the company said in August.

The talks went sour, and government lawyers prepared to file a lawsuit against JPMorgan in September and scheduled a news conference to announce it.

But they cancelled it at the last minute as JP Morgan reached out to government officials to discuss a settlement.

JP Morgan Chief Executive Jamie Dimon met US Attorney General Eric Holder later that month to talk about a deal on mortgage probes.

Negotiations were difficult, people involved in the matter said.

Parties joined the talks, then dropped out. In recent weeks, they stopped, only to restart.

Details of the deal were being worked out hours before it was announced on Tuesday, one person involved said.