Yesterday, the U.S. Justice Department came down hard on Citigroup, slapping the bank with a $7 billion fine over allegations it sold faulty mortgage-backed securities to unknowing investors between 2003 and 2008.
In short, the company knew the mortgages behind the securities were destined to fail, but hid the quality of the mortgages, packaged them up, and shipped them out as quickly as possible. This was a trend at the time…
It probably didn’t take long before the dubious credit quality was apparent, and an e-mail sent by a Citi trader certainly didn’t help the bank’s case.
The trader said quite clearly that “we should start praying,” and that he “would not be surprised if half of these loans went down.”
The loan defects were not unique at the time, inflated incomes and appraised values that would push the loan-to-value ratios beyond 100%.
In other words, oversized loans that couldn’t be supported by real income that would eventually default because the borrower wasn’t actually able to pay the loan for more than a few months, if that.
Anyway, as a result of these actions, Citi has to dole out $7 billion, including $4.5 billion to settle federal and state civil claims.
The other $2.5 billion will be in the form of consumer relief, with some of it going toward financing to provide affordable multifamily rental housing. The rest will be in the form of direct consumer assistance via various relief programs.
Nearly $200 Million Going to the State of California
In the state of California, Attorney General Kamala D. Harris negotiated the largest settlement, with $102,700,000 in damages being reimbursed to the state’s pension funds, CalPERS and CalSTRS.
Another $90 million will go to homeowners affected by the suspect lending policies in place at Citi at the time.
Citigroup will be required to provide relief to underwater homeowners and distressed borrowers by issuing loan modifications and/or providing principal forgiveness.
It’s a little strange that homeowners who overstated their income and got loans with inflated appraisals will now get compensated, but I digress. If you think you might be eligible for relief, you might want to contact Citi sooner rather than later.
If you live in a state other than California, check out your Attorney General’s website for details about your state’s claims, if applicable.
For the record, the settlement doesn’t let the perpetrators off the hook for their wrongdoings, and they could still face criminal charges.
A similar settlement was reached last November when the state of California received $300 million from Chase (out of a total $13 billion) over misrepresentations related to residential mortgage-backed securities sold to CalPERS and CalSTRS.