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Citigroup Could Pay $7 Billion for Mortgage Fraud

blog.silversaver.com | July 10, 2014

By Chelsea Jones

Citigroup and the Justice Department are close to reaching a deal that would cost the bank $7 billion to settle a civil investigation into the sale of mortgage investments, according to an article in the New York Times. The bank is one of eight under federal investigation for mortgage fraud that defrauded investors on billions of dollars worth of mortgage-securities leading up to the financial crisis.

The final settlement will be announced within the next week after tension ensued between the bank and the Justice Department for the last month. The Justice Department had threatened to sue the bank if it did not agree to the proposed penalty, which would serve as a relief for homeowners and a removal of a “legal obstacle that has been weighing on the bank’s share price and casting a shadow over its future.”

While the Justice Department and Citigroup are still working out details, Citigroup will be expected to pay approximately $4 billion in cash and the rest in “soft dollar penalties,” which would include mortgage modifications and other forms of relief to homeowners, according to the article.

Several bank investors are uncertain whether Citigroup has enough legal reserves to cover the cost, especially since the bank is also dealing with challenges with a fraud in its Mexico unit and its failure to pass the Federal Reserve’s stress test.

Last year, JPMorgan Chase agreed to a $13 billion settlement with the Justice Department. That case serves as a template for other banks undergoing similar investigations. Once the settlement is made with Citigroup, speculation implies that Bank of America will be next on the Justice Department’s list.

These banks have been investigated to see whether or not they defrauded investors on billions of dollars worth of mortgage securities in the run-up to the financial crisis, according to Reuters. The banks misled consumers about the quality of bonds backed by housing mortgages as housing prices plummeted. For example, Bank of America made misleading statements and failed to disclose important facts about the mortgages underlying a securitization named BOAMS 2008-A. More than 40 percent of the 1,191 mortgages in this securitization did not comply with the bank’s underwriting standards, Reuters said.

“These misstatements and omissions concerned the quality and safety of the mortgages collateralizing the BOAMS 2008-A securitization, how it originated those mortgages, and the likelihood that the ‘prime’ loans would perform as expected,” the Justice Department said in its statements.

“U.S. Attorneys offices in Brooklyn and Colorado have been investigating the bank as part of a larger task force probing faulty mortgage securities that helped fuel the housing bubble in the mid-2000s and contributed to its collapse,” Reuters said.

Mortgage fraud is defined as “intentionally falsifying information on a mortgage loan application. The intention of mortgage fraud is typically to receive a larger loan than would have been permitted if the application had been made honestly.”

Mortgage fraud perpetrators often include industry insiders such as mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, and bank and trust account representatives. An FBI statement said these perpetrators often target ethnic community members as victims or co-conspirators. After the financial crisis of 2008, the FBI mortgage fraud investigations totaled 2,794 in FY 2009, which is a 71 percent increase from FY 2008. As of April 2010, there were 3,029 pending cases.

The FBI explains that mortgage fraud perpetrators take advantage of the opportunities provided in a distressed housing market. When the market is down and lending is tight, perpetrators gravitate to loan origination schemes involving fraudulent or manufactured documents. For example, one scheme would be the inflated income scheme. This involves making deceptive calculation of a borrower’s monthly income or outright falsifying documents to determine the qualifying income. So someone could apply for a loan using higher seasonal income or a one-time payment that would not be likely to continue throughout the year or an insider could alter or forge W-2 forms, pay stubs or tax returns to help this individual qualify for a loan they should have never received.

Another origination scheme would be an appraisal scheme. This involves inflating a property’s appraised value in order to qualify it for a loan program. This occurs by omitting or exaggerating facts about the subject property or comparing it to sales that are completely unrelated to the subject property.

This might seem complicated, but you can review eight different kinds of mortgage fraud schemes here or on the FBI statement linked above.

Mortgage loan fraud is a real and prevalent issue in the mortgage lending industry. This federal crime is punished by fines, restitution, and imprisonment up to 30 years. Some analysts argue that the individual perpetrators in these banks responsible for the fraud should be imprisoned and that the elaborate fines do not administer enough justice. Some economists along with Attorney General Eric Holder argue that incriminating the banks would have a “negative impact on the national economy, perhaps even the world economy.” In other words, these individuals and bank officials are “too big to jail” and the failure of a bank could lead to an economic collapse. Opposers of this argument say that the cost of committing crimes should be more than just an expensive crime paid by someone else (the bank) and should involve jail time for individuals.

“What this lack of criminal prosecution reflects is timidity by prosecutors who seem to have forgotten how to do their jobs,” said Barry Ritholtz in an article in the Bloomberg View.

Whether or not the fines are “enough,” the Justice Department continues to crack down on eight banks under federal investigation.


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CFLA was founded by the Nation's Leading Foreclosure Defense Attorneys back in 2007 to serve the Foreclosure Defense Industry and fight pervasive Bank Fraud. Since opening our virtual doors, CFLA has rapidly expanded to become the premier online legal destination for small businesses and consumers. But as the company continues to grow, we're careful to hold true to our original vision. For us, putting the law within reach of millions of people is more than just a novel idea—it's the founding principle, just ask Andrew P. Lehman, J.D.. With convenient locations in Houston and Los Angeles, you can contact Our National Account Specialist and General Manager / Member Damion W. Emholtz at 888-758-2352 for a free Mortgage Fraud Analysis or to obtain samples of work product, including cutting edge Bloomberg Securitization Audits, Litigation Support, Quiet Title Packages, and for more information about our Nationally Accredited and U.S. Department of Education Approved "Mortgage Securitization Analyst Training Certification" Classes (3 days) 24 hours for approved CLE & MCLE Credit (Now Available Online).

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