Citigroup will pay $158.3M to settle mortgage suit

Citigroup (C) has agreed to pay $158.3 million to settle civil charges that it committed fraud in issuing government-backed home loans that soured after the housing crash.

In a lawsuit announced on Wednesday, federal prosecutors alleged that the financial giant's CitiMortgage unit falsely claimed that thousands of loans it made in the years leading up the housing crash were eligible for insurance through the Federal Housing Administration. The company failed to verify the quality of the mortgages and violated government underwriting standards, the U.S. Justice Department said in announcing the settlement.

That caused more than 30 percent of the loans originated or underwritten by CitiMortgage to go into default, resulting in foreclosures and hurting the broader U.S. housing market, according to the suit. As a result, the Department of Housing and Urban Development had to pay "millions of dollars" in insurance claims on the soured loans.

The government also said that CitiMortgage pressured its quality-control personnel to ignore troubled loans, applying what the Justice Department called "brute force" in masking the severity of the problems. These practices caused a "systemic breakdown" in the unit's quality-control program, prosecutors charged.

"For far too long, lenders treated HUD's insurance of their mortgages like they were playing with house money. In fact, they were playing with other people's money and other people's homes," Manhattan U.S. Attorney Preet Bharara said in a statement. "We are pleased that, with today's settlement, CitiMortgage has accepted responsibility for its conduct and agreed to pay damages in an amount that will significantly compensate HUD in this case for losses to the FHA insurance fund."

A Citigroup spokesman told Reuters that the bank already has reserved money to cover the financial penalty and that the company takes its "quality-assurance processes seriously."