Citigroup admits mortgage fraud in $158-million settlement

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 Department of Housing and Urban Development. The government provided backing for the mortgages and ended up losing millions when the borrowers defaulted.

In the complaint filed Wednesday as part of the settlement, the U.S. attorney's office in Manhattan said 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-creditworthy 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. Citigroup said it would continue making FHA-insured loans.

The lawsuit against Citigroup stems from a series of federal investigations of lenders that made mortgages insured by the FHA.

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 said 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.

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