Friday, February 17, 2012

As you all probably know, I foster a particular unfondness for ShittyGroup. I wouldn't shed a tear if they went under. In fact I may throw a party. Big one. You're all invited.

So, thanks to Will for this one.

Bloomberg:

Citigroup Whistle-Blower Says Bank’s ‘Brute Force’ Hid Bad Loans From U.S.


Four years after rotten mortgages helped trigger a global financial crisis, Sherry Hunt said her Citigroup Inc. quality-control team was still finding flaws in new loans that included altered tax forms, straw buyers and borrowers who listed fictitious employers.

Instead of reporting the defects to the Federal Housing Administration, the bank saddled the agency with losses by falsely declaring the loans fit for its federal insurance program, according to a complaint filed yesterday by the U.S. Attorney’s Office in Manhattan. Citigroup agreed to pay $158.3 million to settle the claims, and admitted that it certified loans for FHA backing that didn’t qualify.

Hunt, who filed a sealed lawsuit against New York-based Citigroup in August that the government joined, will collect $31 million of that sum -- before taxes and attorney’s fees -- as a whistle-blower, she said in an interview yesterday. The settlement, which encompassed misconduct spanning 2004 to the present, indicates Citigroup has lingering problems in its O’Fallon, Missouri-based CitiMortgage unit.

“Citigroup in particular received government funding, taxpayer dollars, because of its risky operations,” said Peter Henning, a law professor at Wayne State University in Detroit.“It shows that they hadn’t really learned much of a lesson from the financial crisis.”

Inspector General

The inspector general for the U.S. Department of Housing and Urban Development faulted Citigroup’s quality-control program during a 2008 audit, according to the complaint. Taxpayers rescued the bank with a $45 billion bailout that same year and guaranteed more than $300 billion of its risky assets after the lender’s stability was threatened by mounting costs on soured loans. The bank lost a total of $29.3 billion in 2008 and 2009.

Hunt’s co-workers, instead of checking for fraud or making reports about underwriting defects to the FHA as required, argued with her over the soundness of the loans, she said. Employees who acted as “gatekeepers” applied “what they describe as ‘brute force’ to pressure Citi’s quality control managers” into downplaying defects, according to the government’s complaint.

Some colleagues had pay incentives tied to reducing the number of reported problems, and they spent hours trying to get her to relax her warnings, including those about the most basic deficiencies, Hunt said.

‘Beating Us Up’

“They started beating us up over the quality-control reports,” she said.

Last year, she said, she became convinced she was being asked to look the other way on serious flaws. That’s when she decided to become a whistle-blower.

“All a dishonest person had to do was change the reports to make things look better than they were,” Hunt said in an interview. “I wouldn’t play along.”

Citigroup has approved about 30,000 loans with a value of $4.8 billion for FHA insurance since 2004; more than 30 percent of those borrowers have quit paying, the Justice Department said in its complaint. Almost half the bank’s FHA loans originated in 2006 and 2007 have defaulted, the government said, with HUD paying out almost $200 million in insurance claims on mortgages Citigroup originated or underwrote since 2004.

Mark C. Rodgers, a Citigroup spokesman, said bank executives were pleased to resolve the matter.

Improvements Undertaken

“We take our quality-assurance processes seriously and have proactively undertaken process improvements to ensure that they are as robust as possible,” Rodgers said in an e-mailed statement. “We are committed to continuing to work with the Department of Housing and Urban Development to make mortgage loans available to low- and moderate-income borrowers through the FHA program.” He declined to comment further.

The CitiMortgage unit is run by Sanjiv Das, who was hired by Chief Executive Officer Vikram S. Pandit, 55, in July 2008. Das reports to consumer-banking head Manuel Medina-Mora and Eugene McQuade, head of Citibank N.A., the bank’s deposit-taking unit. Both Das and Pandit are former Morgan Stanley executives. Das declined to be interviewed.

Citigroup executives say they fixed trouble spots throughout the bank after it took the most bailout money of any U.S. financial institution during the credit crisis. Its shares have tumbled 35 percent over the past year, underperforming the 24-member KBW Bank Index (BKX), which fell 20 percent in the same period. Pandit in 2010 promised a “New Citi” that “practices responsible finance.”

Star Players

Efforts to quash negative quality-control reports about mortgages continued into 2011, according to the complaint. That January, at a quarterly staff meeting that Hunt said 1,000 people attended, CitiMortgage managers gave a “Star Players Award” to workers who had successfully challenged negative reviews during meetings with quality-assurance workers and others, according to the complaint.

“Many of the quality-assurance underwriters who sat in those meetings were humiliated in front of everyone,” Hunt said.

Her supervisor, Michael Watts, said in a May 21, 2010, e-mail that the challenges were aimed at improving numbers tied to compensation, not fixing the underlying problems.

“Instead of reviewing and analyzing results and then teaching their channels what is needed to improve, they’re being encouraged to rebut legitimate variances in an effort to drive down the rate. It appears that is how their worth is being measured,” Watts wrote, according to the government’s complaint.

Watts, reached at his home in Michigan, said he hadn’t seen the complaint and declined to comment further.

Records Erased

The complaint describes a broken mortgage-processing system. In one instance, employees erased records of about 1,000 loans that Hunt’s quality-control team identified as possibly fraudulent, according to the complaint. Defects identified by the quality-control team didn’t make it into reports, a violation of HUD requirements, it said.

“A substantial percentage of those claims resulted from loans that were ineligible for FHA insurance and never should have been insured,” the government said in the complaint.

The FHA insures qualified loans, relying on what it calls Direct Endorsement lenders such as Citigroup to make sure the mortgages adhere to its guidelines. Lenders are required to notify the FHA when they find underwriting flaws.

Hunt, who lives in Silex, Missouri, said she started in the mortgage business as a loan processor for a small Fairbanks,Alaska, lender in 1975. She was hired by Citigroup in 2004 and is now a vice president of quality assurance. She sued the bank, the third-largest in the U.S. by assets, under the False Claims Act, charging that the company defrauded the government.

‘The Little Guys’

“When this process began, Sherry had no idea there was a monetary award and what she could get,” said her attorney, Finley D. Gibbs of Rotts & Gibbs LLC in Columbia, Missouri.“She risked everything. We were the little guys standing up to the big guys.”

The $158.3 million that the bank is paying is the second-biggest ever in a mortgage-fraud case, said Jerika Richardson, a spokeswoman for the U.S. Attorney’s Office in the Southern District of New York. The largest was the $1 billion agreement on Feb. 9 between the U.S. and Bank of America Corp. and its Countrywide mortgage unit.

“I had to do something to stop them,” Hunt said. “I felt that if I were brave enough to come forward and take a stand, then maybe others would, too.”

U.S. District Judge Victor Marrero in New York approved the accord and unsealed Hunt’s lawsuit yesterday. CitiMortgage must pay the agreed-on amount within 30 days, said Manhattan U.S. Attorney Preet Bharara.

Fourth-Quarter Charge

Citigroup will record a $125 million after-tax charge to fourth-quarter results “in connection with the resolution of related mortgage litigation,” according to a Feb. 9 statement.

The FHA, whose cash has been depleted amid increasing insurance payouts to cover rising defaults among borrowers, announced on Jan. 20 “steps to limit risk and strengthen finances.” They include holding lenders accountable for “fraud and misrepresentation such that the mortgage never should have been endorsed by the lender.”

Under the settlement, the government reserved the right to pursue criminal charges. Citigroup’s mortgage unit will work with HUD to maintain business practices that comply with the department’s requirements, according to the settlement.

“What it’s going to require in Citigroup, that unit, is a real change in their culture,” Henning said. “It will be interesting to see if Citigroup can pull it off.”

Accused in Testimony

Citigroup was accused of spotty underwriting in testimony in April 2010 before a committee created by Congress to investigate the financial crisis.

The bank bought at least $70 billion of mortgages from outside originators in 2006 and 2007 that didn’t meet Citigroup guidelines, according to Richard M. Bowen III, who supervised more than 200 underwriters for the bank from 2006 to 2008.

Bowen told the Financial Crisis Inquiry Commission, or FCIC, that he began warning supervisors in June 2006 about the defective loans and continued through 2007 as the defect rate climbed to 80 percent.

Citigroup began an investigation and the head of the group responsible for the poor underwriting was fired, according to a Nov. 1, 2010, letter to the FCIC from Brad S. Karp, chairman of Paul Weiss Rifkind Wharton & Garrison LLP law firm in New York.

In the second half of 2009 and the first half of 2010, 15 percent of the performing loans Citigroup sold to Freddie Machad such flaws as incomplete appraisals, missing insurance documents or miscalculations of income, according to an internal Freddie Mac review of 375 mortgages obtained last year by Bloomberg News.

The upper limit for defects should be about 5 percent, Hunt said.

Other Litigation

Citigroup faces other litigation over mortgage-related securities, including a suit filed by the U.S Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the government-controlled mortgage buyers.

“Citigroup seems willing to work with HUD to resolve these isssues,” Hunt said. “I take that as a positive sign.”

The case is U.S. ex rel. Hunt v. Citigroup Inc. (C), 11-cv-005473, U.S. District Court, Southern District of New York (Manhattan).

2 comments:

Unknown said...

Thanks Midnight!:)
Thought you would like this story.

Epaminondas said...

Nothing to see here, move along, I mean what do they do that BoA, JP Morgan, and Goldman didn't do?


ANYONE ON THE TBTF LIST SHOULD BE BROKEN UP IMMEDIATELY.
EVERY ONE OF THOSE ORGANIZATIONS IS A DANGER TO THE REPUBLIC.
THEIR RELATIONSHIP TO THE USA GOVT IS THE SAME AS KRUPP, AND BASF TO THE REICH