Massachusetts will get at least $55.7 million from the multibillion-dollar settlement Citigroup Inc. reached with the US Department of Justice for misleading investors into buying risky mortgage-backed securities, which collapsed in value during the housing bust.
The New York financial services giant will pay a whopping $7 billion, including a fine of $4 billion, for collecting and reselling packages of high-risk subprime mortgages that Citigroup employees had internally acknowledged would probably fail. The subprime mortgage crisis and resulting financial crisis are widely blamed for triggering the recession from which the United States is only now recovering.
“The bank’s activities contributed mightily to the financial crisis that devastated our economy in 2008,” Attorney General Eric Holder said in announcing the settlement Monday. “Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business.”
Massachusetts will receive a portion of the settlement because it was one of the first states to launch an investigation into Citigroup’s mortgage practices. Four other states will share in the proceeds to also resolve their civil cases against the bank: Delaware, New York, Illinois, and California.
At least $25 million will go to Massachusetts consumers to help with lowering their mortgage bills; the state’s pension investment agency, which had purchased Citigroup mortgage securities, will receive about $6.5 million. The remaining $24.2 million will go the state treasury.
Before the financial crisis, mortgage lenders and banks such as Citigroup made subprime loans with short-term teaser rates to borrowers with shaky credit histories. The banks then bundled these loans and sold them to investors as safe products. But when the higher interest payments on these loans kicked in, many borrowers were unable to afford the higher mortgage payments and defaulted, causing investors to lose billions.
Internal Citigroup e-mails released as part of the settlement revealed the bank’s employees knew that the loans could collapse.
One Citigroup trader wrote that after going through the diligence reports, “[they] should start praying . . . [he] would not be surprised if half of these loans went down . . . It’s amazing that some of these loans were closed at all.”
Citigroup chief executive officer Michael Corbat said the settlement should resolve pending investigations of its past residential mortgage-backed securities activities.
“We believe that this settlement is in the best interests of our shareholders and allows us to move forward and to focus on the future, not the past,” Corbat said in a statement.
Despite the huge settlement, Citigroup reported Monday that it made $181 million in net income in the second quarter of this year. Excluding the costs of the settlement, Citigroup made $3.9 billion during that period.
Citigroup is the latest bank to settle with the Justice Department about mortgage-backed securities. In November, JPMorgan Chase & Co. agreed to pay $13 billion to resolve similar claims. Bank of America Corp. is also in settlement negotiations.
This is the seventh case involving mortgage-backed securities that the state has helped resolve, Massachusetts Attorney General Martha Coakley said. Coakley took credit Monday for opening some of the first investigations into Wall Street investment activities blamed for the crisis.
In all, the state has recovered nearly $360 million from the nation’s banks since 2009 in cases involving low-quality, mortgage-backed securities.
So far, more than 4,000 borrowers have received mortgage principal reductions or are in line for relief through these settlements, Coakley’s office reported in April. Massachusetts homeowners received reductions on their home loans that ranged from an average of less than $4,000 to nearly $100,000, depending on which company held their mortgage and the settlement’s amount.
The state will try to identify additional eligible homeowners. Those who have already lost their home could still get a check through this settlement, state officials said.