Mortgage Insurance

Most people in Grand Prairie, Arlington, Mansfield, Fort Worth, Dallas, and other places in Dallas County or Tarrant County would have little to no idea how mortgage insurance works or what effect it has. Here is an article that ran at latimes.com on February 15, 2012.
The title of the article is, “Citi Admits Mortgage Fraud In $158-Million Settlement. The authors of the article are Nathaniel Popper and Scott Reckard.
The article tells us that Citigroup, Inc. is paying $158 million to settle accusations that it took advantage of a federal mortgage insurance program.
In a settlement with the Justice Department, Citi admitted that it provided misleading information about the quality of its mortgages to a federal insurance program run by the U.S. Department of Housing and Urban Development. The government provided backing for the mortgages and ended up losing millions when the borrowers defaulted.
In a complaint filed Wednesday as part of the settlement, the U.S. attorney’s office in Manhattan said that CitiMortgage violated the rules of the Federal Housing Administration insurance program for six years until it was subpoenaed in July.
“For far too long, lenders treated HUD’s insurance of their mortgages like they were playing with house money.” U.S. Atty. Preet Bharara said in a statement.
The government insurance allowed Citi to give cheaper loans to less-credit-worthy borrowers and then to sell the loans to investors. The complaint provides another look at how the nation’s largest banks helped inflate the mortgage bubble by misleading government authorities.
In a statement, Citigroup said it was pleased to have settled the FHA fraud case, saying it had set aside provisions in the fourth quarter to cover the resulting legal costs.
“We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as robust as possible,” the Citigroup statement said.
Citigroup said it would continue making FHA-insured loans “with the full support of HUD. We are committed to continuing to work with HUD to make mortgage loans available to low and moderate income borrowers through the FHA program.”
The lawsuit against Citigroup stems from a series of federal investigations of lenders that made mortgages insured by the FHA.
The largest of these civil fraud cases to date involved Bank of America Corp. and Countrywide Financial Corp., the Calabasas company B of A acquired in 2008. The companies agreed last week to a $1-billion settlement of claims that Countrywide, once the largest home lender, defrauded the FHA by knowingly writing loans for unqualified buyers and by issuing loans based on inflated appraisals.
The $1 billion was to be funded half in cash and half in loan modifications for borrowers whose mortgages are greater than their home values. The agreement was part of a $25-billion settlement between the five largest providers of mortgage customer service, federal authorities and the attorneys general of every state except Oklahoma.
Bharara’s office has previously sued Deutsche Bank and Allied Home Mortgage Corp. on similar grounds.
The major banks were part of a program that allowed them to get automatic approval for government insurance for the mortgages they were issuing. As part of the program, the banks were supposed to aggressively pre-screen the mortgages, to make sure they were not too risky and report any signs the mortgages were having trouble.
The complaint filed Wednesday said that Citi systematically ignored these rules, leading the government to insure lower-quality loans. More problematically, employees in Citi’s mortgage unit are accused of asking members of the compliance department to not report problems with the mortgages to the government.
“Citi’s quality-control reports become – and remain – a battleground within Citi, with those in Cit’s business production units applying what they describe as ‘brute force’ to pressure Citi’s quality-control managers to downgrade their findings.” the complaint said.
Citigroup mortgage spokesman Mark Rodgers declined to comment on that part of the federal lawsuit.
Ultimately 30% of the loans originated by Citi after 2004 – and 47% of those in 2006 and 2007 – ended up in default.