CitiMortgage has agreed to pay $158 million in fines to the US government to settle a lawsuit filed by the Dept. of Housing and Urban Development for fraudulent underwriting practices on Federal Housing Administration (FHA) loans.
CitiMortgage is one of the largest lenders that is an FHA Direct Endorsed (DE) lender. Since 2004 CitiMortgage originated more than 30,000 FHA loans, with more than 30% going into default. Of the FHA loans given out by CitiMortgage in 2006-2007, 47% ended up in default.
The FHA insures loans and relies on the DE lenders to oversee that underwriting standards are followed. CitiMortgage and the other DE lenders can automatically get government insurance through the FHA. The FHA counts on the DE lenders to thoroughly examine all mortgage loan documents, and follow the strictest underwriting considerations. The DE lender must carefully evaluate the riskiness of loans and report any problems. CitiMortgage, as a DE Lender, is expected to weed out bad loans.
The US Dept. of Housing and Urban Development (or HUD, which oversees the FHA) issued a press release about the settlement. In it, U.S. Atty. Preet Bharara said, "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."
CitiMortgage, along with other lenders, misused the system, and allowed bad loans to pass through the underwriting and review system. This is the third lawsuit by the US Attorney's Civil Fraud Unit, the other two against Deutsche Bank and Allied Home Mortgage Corp.
Paying such a large fine means that CitiMortgage and other DE lenders will adhere more closely to the rule book. Lenders, like CitiMortgage, will process their loans more carefully, with the effect on you being a longer time to get a loan approved, and a longer time to fund a loan.
This will be inconvenient for you, as a borrower. However, if lenders pay more careful attention to the lending guidelines and stop abusing the process, then there will be a more stable lending environment, as well as a more stable housing environment.
It is important that you prepare yourself to get the best loan possible. Bills.com offers many articles and tools to help you make the best decision about buying a home, taking a mortgage, and refinancing.