There is no doubt that countless mortgages underwritten a few years ago, particularly during 2006 and 2007, were defective. Even though the banks knew of the defects, they packaged and sold these toxic securities, assuring investors, often falsely and blatantly, of their economic integrity. Everyone knows all too well the result of these reckless actions and the tremendous toll it took on homeowners, the real estate market, and the economy as a whole. Regardless, it is in the past, which we cannot change, and we have seen gradual signs of recovery and progress over the last few years. We can only hope that the catastrophic fall out serves as a strong lesson for the future.
So far, the Department of Justice has investigated many of the banks for their mortgage transgressions. Some of these cases are still in progress, and the government and banks finalized others with settlements that required the banks to make substantial payments as compensation. The government’s case against Citigroup recently settled, and the final terms of the agreement contain one of the largest cash penalties imposed to date.
Citigroup’s initial offer to settle the Department of Justice’s case against the bank regarding its mortgage practices was $363 million. The final settlement is going to cost Citigroup $7 billion, a difference of over $6.6 billion. And quite a difference that is. Apparently, the bank tailored its original offer on the basis of its share of the market for mortgage securities. The government, on the other hand, was focused on the bank’s level of culpability for its apparent wrongdoing. Ultimately, there wasn’t exactly a meeting in the middle. Rather, the government’s penalizing view of the situation seems to have prevailed.
So, what exactly does that $7 billion settlement include? Well, $4 billion of the total amount is a straight up cash penalty that will go directly into the U.S. Treasury’s general coffers. The money isn’t even designated for a specific use; the government is just getting a hefty boost to its general fund. The most interesting part of the settlement agreement pertains to the bank’s commitment to finance rental housing. Specifically, the bank will provide $180 million for the construction of affordable housing in areas where the cost of living is high. This is a rather unusual addition for a mortgage securities settlement agreement. It seems that the government is seeking creative ways to penalize the banks for their irresponsible actions that resulted in an epic financial crisis. The rest of the money from the settlement will be used to reimburse various creditors, including failed banks that had large mortgage security investments and states that witnessed mortgage-related losses. Regardless of where that money is going, it seems safe to say that the $7 billion mistake will deter future indiscretions.