Kokomo Tribune; Kokomo, Indiana

Business

July 14, 2014

Citigroup to pay $7B in subprime mortgages probe

Washington — Citigroup announced Monday that it will pay roughly $7 billion to settle a federal investigation into risky subprime mortgages, the type that helped bring on the financial crisis.

The bank, one of America's largest, revealed the deal as part of its quarterly earnings report. Justice Department officials were expected to discuss it at a news conference later Monday.

The settlement stems from the sale of securities made up of subprime mortgages, which led to both the housing boom and bust that triggered the Great Recession at the end of 2007.

Citigroup and other banks downplayed the risks of subprime mortgages when packaging and selling them to mutual funds, investment trusts, pensions, as well as other banks and investors. The securities, which contained so-called residential mortgage-backed securities and collateralized debt obligations, plunged in value when the housing market collapsed in 2006 and 2007. Those losses triggered a financial crisis that pushed the economy into the worst recession since the 1930s.

The bank separately agreed in April to pay $1.13 billion to settle claims by investors seeking that the lender buy back billions of dollars in residential mortgage-backed securities.

In the deal announced Monday, Citigroup will make a $4 billion civil monetary payment to the Justice Department, and another $500 million in compensatory payments to state attorneys general and the Federal Deposit Insurance Corporation.

The bank will provide $2.5 billion in consumer relief, which will include financing for construction and preservation of affordable housing, as well as principal reduction and forbearance for residential loans.

CEO Michael Corbat said the settlement ends all pending civil investigations related to its handling of mortgage-backed securities.

The two sides had earlier been far apart in their negotiations. The Justice Department had warned last month that it would sue after the bank offered to pay under $4 billion to resolve the matter, a sum substantially less than what the government was seeking.

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