Citi Fraud Settlement may have Fallen Short

Econintersect:  Yesterday (February 17) GEI News reported on a Wednesday (February 15) article in The New York Times about a settlement of $158.3 million paid by Citigroup resulting from mortgage fraud that victimized the FHA (Federal Housing Administration).

Bloomberg reports that $31 million will go to whistleblower Sherry Hunt, an employee of Citigroup’s quality control team who personally filed the suit (which the government later joined) that led to the settlement.  Hunt will pay attorney and legal fees out of that sum.

The FHA will receive $127 million, less any outside attorney fees and expenses.

The fraud appears to have continued into 2011, years after audits pointed out the problems.  In fact, after a 2008 audit by HUD the fraud is reported to have increased.  From Reuters (emphasis added):

Investigators said 9,636, or more than 30 percent, of nearly 30,000 HUD-insured mortgage loans that CitiMortgage made or underwrote since 2004 have defaulted, costing the agency nearly $200 million in insurance claims.

“For far too long, lenders treated HUD’s insurance of their mortgages like they were playing with house money,” U.S. Attorney Preet Bharara in Manhattan said in a statement. “In fact, they were playing with other people’s money and other people’s homes.”

The government also contended that even after a 2008 HUD audit found “numerous defects” in CitiMortgage’s oversight of loans in default, quality control deteriorated.

It said this was in part because the unit pressured workers to encourage quality control personnel to ignore problems, rewarding them with higher salaries if they succeeded.

In January 2011, for example, CitiMortgage held a “Star Players Award” ceremony for the efforts of some workers to challenge defects reported by the quality control unit.

According to the complaint, even after Citi’s fraud unit confirmed that loans were fraudulent, another unit responsible for self-reporting the loans to HUD rarely did. In August of 2010, Hunt, the whistleblower, commented to Michael Watts, the director of quality control, that “there are so few loans being self-reported that I am not sure the process still exists,” according to the complaint. She was told the process had been “transferred back to the (business) channels.”

Some of the loans that Citi failed to report included mortgages that defaulted when their first payment was due and had other signs of mortgage fraud, according to the complaint.

There seems to be some uncertainty about how many years of Citigroup’s mortgage activities are actually covered. The New York Times said six years; Bloomberg said the activity spanned 2004 to the present, which would be eight years.  The question of time span is important in light of the Reuters findings (excerpt above) that the fraud continued into 2011.  The question remains open:  was the most recent fraud recognized and covered in the settlement?

Summary of the current status for this story:

• The payment to the FHA for damages will net to $127 million vs. nearly $200 million in insurance claims paid to date.

• The numbers do not seem representative of mortgage defaults.  There have been 10,000 defaults in the CitiMortgage group of 30,000.  If the cost has been less than $200 million, that is less than $6,700 per default.  See discussion in editor’s note below.

• The various reports do not make consistent statements about the time frame of Citigroup activity covered by the settlement agreement.

• The question is open whether further defaults will occur from the fraud or whether additional insurance claims can or might be presented.

• There is no relief for those suffering collateral damage from this activity:  communities affected and individual homeowners within those communities.  See GEI News 17 February.

Editor’s note: If average amount lost in default is correct ($6,700) and if that had been the average loss for the 4.5 million foreclosures completed through 2011, only $30 billion in losses would have been booked so far.  One year ago Barry Ritholtz estimated that mortgage default losses would be $400-$500 billion for Fannie and Freddie and an equal amount (or more) for the rest of the banks and investors for a total around $1 trillion.  If the mortgage default crisis is about 1/3 completed then about $300 billion ($67,000 per foreclosure) is the approximate loss number for the total mortgage market.

The numbers in the Citigroup case reflect only about 1/10 the loss rate for the total mortgage market.  This settlement deserves a thorough audit.

Sources:

• Citi Pays $158 Million Settlement for Fraud (GEI News, 17 February 2012)

• Citigroup to Pay $158 Million in Mortgage Fund Settlement (Associated Press, The New York Times, 15 February 2012)

• Citigroup Whistle-Blower Says Bank’s ‘Brute Force’ Hid Bad Loans From U.S. (Bob Ivry, Donal Griffin and Andrew Harris, Bloomberg, 16 February 2012)

• Citigroup pays $158 million in mortgage fraud pact (Jonathan Stempel, Reuters, 17 February 2012)

• Foreclosure Problem Still Has 2/3 to Run (John Lounsbury, GEI Analysis, 12 February 2012)

• GSEs:  $1 Trillion Dumping Ground for Bad Bank Loans (Barry Ritholtz, The Big Picture, 14 June 2010)