After contentious negotiations and threats of lawsuits, the Justice Department is reportedly nearing a settlement with Citigroup regarding sales of mortgage-backed securities with misrepresented high risk prior to the 2008 housing crash. The settlement is expected to be nearly $7 billion, with $4 billion in cash penalties and the remaining $3 billion or so to be used for homeowner relief and payments to state Attorneys General.
Citigroup is anxious to put this chapter behind them, as they are simultaneously dealing with $700 million in loan fraud losses at their Mexican affiliate, Banamex, while also failing the “stress test” of the Federal Reserve for the second time in three years.
Citigroup is not the first major bank to reach a settlement with the Justice Department regarding misrepresented mortgage-backed securities – JPMorgan Chase, a much bigger contributor to the problem, settled last year for $13 billion. In their case, $4 billion of the relief is to be directed to homeowners.
The Justice Department announcement of the settlement noted that the relief was not specified but included forgiveness of principal, modified loans, and “efforts to reduce blight”, among other remedies.
What about the other $9 billion? It is dispersed among government and regulatory agencies, of course.
$2 billion goes to the Justice Department under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the backing legislation allowing Justice to take action. $4 billion goes to the Federal Housing Finance Agency (FHFA), the government conservators of Fannie Mae and Freddie Mac. $1.4 billion and a little over $0.5 billion goes to the National Credit Union Administration (NCUA) and the Federal Deposit Insurance Corporation (FDIC), respectively. The remainder settles state claims from California, New York, Delaware, Massachusetts, and Illinois.
As for investors, they sought separate legal relief. JPMorgan Chase had previously reached a $4.5 billion settlement with Gibbs and Bruns, LLC representing 21 institutional investors including Blackrock Financial and Goldman Sachs. Citigroup reached a similar $1.125 billion agreement with 18 institutional investors.
With JPMorgan Chase as a reference, the total Citigroup penalty is arguably disproportionate to their role. That bodes poorly for Bank of America, who is next up on the settlement hit list. It appears that the focus is increasingly on punitive damages.
Even with these efforts, some claim the government is letting the banks off too easy. Better Markets, Inc. filed suit attempting to repeal the $13 billion JPMorgan Chase settlement, claiming the settlement effectively established “blanket civil immunity” without making their wrongful actions transparent, thus violating separation of powers. The Justice Department has argued that Better Markets has no legal standing to sue (meaning they suffered no harm from the alleged actions of the bank), and most experts agree that this lawsuit is likely to be thrown out for that reason – yet as of July 8th, Better Markets is still defiantly charging ahead in D.C. District Court.
The Justice Department has managed to get tougher and extract greater penalties from the banks involved in the sale of toxic mortgage-backed securities. However, the lion’s share is still directed toward government coffers, with less toward the compensation of homeowners harmed in the crisis. Institutional investors are pursuing their remedies in separate court actions.
If you are one of the homeowners affected through JPMorgan Chase, contact information is located at https://www.chase.com/mortgage/mortgage-assistance/national-mortgage-settlement for you to see what help is available and submit an application for relief. For Citigroup and the eventual Bank of America customers, keep an eye out in the news for information on pending homeowner relief.
It appears Citigroup is now approaching the light at the end of the tunnel with respect to its mortgage-backed securities problems. However, if you are invested in Bank of America, be prepared for a likely hit next year that does not just exhaust the legal fund but dips into the bottom line.
In the end, the question looms: are these penalties, along with regulatory oversight, sufficient to keep a similar crisis from happening again? An objective observer would likely answer, “No,” as JPMorgan Chase never admitted violating the law – which was one of the key points Better Markets was making all along.