Bloomberg News

Citigroup ‘Defrauded’ Fannie, Freddie, Whistle-Blower Claims

February 28, 2012

Feb. 22 (Bloomberg) -- Citigroup Inc., which last week admitted breaking Federal Housing Administration rules and paid a fine, also violated regulations for home loans sold to Fannie Mae and Freddie Mac, according to a whistle-blower’s complaint.

The bank “defrauded, falsified information or misled federal government entities” by selling or securing insurance for mortgages with defects such as improper appraisals and paperwork errors and not reporting them as required, Sherry Hunt, a Citigroup quality-assurance vice president, said in her complaint, which was unsealed yesterday. It was filed under the False Claims Act in federal court in Manhattan in August.

For Citigroup, the third-largest U.S. bank by assets, the high defect rates could be costly. It might be forced to buy back substandard mortgages sold to government-controlled Fannie and Freddie, who buy or guarantee most U.S. mortgages.

Under the Feb. 15 settlement with the U.S. on FHA loans, Citigroup will pay $158.3 million. The Justice Department reserved the right to pursue criminal and other charges related to mortgages originated or underwritten by Citigroup and not insured by the FHA.

“Everyone is a little bit guilty for not keeping an eye on the processes and doing what we should have been doing,” Hunt said in a phone interview from her home in Silex, Missouri. “Managers have to take ownership of their area, know what’s going on and make sure they’re doing the right thing.”

‘Quality Assurance Processes’

Last year, Citigroup repurchased 6,600 loans from government buyers, an 89 percent increase from 2010, according to a presentation on its website. The bank set aside $1.2 billion to buy back defective mortgages as of the end of 2011 -- the most ever, and up from $969 million in 2010.

“We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as strong as possible,” Sean Kevelighan, a Citigroup spokesman, said in an e-mailed statement.

Andrew Wilson, a spokesman for Washington-based Fannie Mae, and Chad Wandler, a spokesman for McLean, Virginia-based Freddie Mac, declined to comment.

Hunt said New York-based Citigroup knowingly vouched for the quality of loans that were “deficient” in income documentation, had incomplete borrower job histories, appraisal problems, errors in closing paperwork, missing credit reports and miscalculated maximum mortgage amounts, among other flaws. The failures continued into last year, Hunt said.

List of Loans

Some managers’ compensation was tied in part to reducing the defect rate, Hunt said.

CitiMortgage, Citigroup’s home-loan 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.

During an April 7, 2010, meeting with Freddie Mac executives at the main Citigroup mortgage-processing facility in O’Fallon, Missouri, Mike Mazanec, head of CitiMortgage’s Fraud Prevention and Investigation unit, said all loans flagged for possible fraud were resolved within 15 to 30 days -- “a false statement,” Hunt said in the complaint.

In fact, in a list of about 1,000 loans referred to the fraud unit because they were suspected to be fraudulent, many were more than year old and some were eventually erased from the Citigroup computer system, according to Hunt’s complaint.

Attempts to reach Mazanec for comment at a phone number listed under his name were unsuccessful.

‘Thin Ice’

Hunt cited an “overall systemic failure” in her complaint that she said in a May 2011 letter to the Securities and Exchange Commission “threatens the thin ice the entire market is treading on.” The letter was also released yesterday.

For certain types of home loans, Citigroup’s “defect rate” -- the rate at which the underwriting raised questions -- was 80 percent, said Hunt, 54.

Fannie Mae and Freddie Mac have survived on taxpayer aid since September 2008, when catastrophic losses from failing home loans forced them into government conservatorship.

Since then, the companies have drawn more than $180 billion from a U.S. Treasury Department lifeline. Today, they guarantee about $100 billion worth of new mortgages a month, about three- fourths of all single-family home loans.

Hunt said she was hired by Citigroup in 2004. She said she worked for Richard M. Bowen III, the former Citigroup underwriter who testified in April 2010 to the Financial Crisis Inquiry Commission, the panel created by Congress to investigate the causes of the 2008 financial meltdown.

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

--With assistance from Bob Van Voris and Donal Griffin in New York and Lorraine Woellert in Washington. Editors: Anne Reifenberg, Peter Blumberg

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.

To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.


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