CitiMortgage: FHA Certifications and the Pressure to Downgrade Defects

In its mortgage fraud case, CitiMortgage agreed to pay $158.3 million over false Federal Housing Administration loan certifications and failures to review early payment defaults. The Justice Department described nearly 30,000 mortgages endorsed for FHA insurance since 2004. The lender admitted that it certified loans for federal mortgage insurance that did not qualify, leaving the Department of Housing and Urban Development with losses when those loans defaulted. For someone inside underwriting or quality control, the case reaches a familiar conflict: what the loan review found, and what the business wanted the finding to say.

The Southern District of New York approved the settlement on February 15, 2012, after the Justice Department joined a private whistleblower’s False Claims Act case. This page follows CitiMortgage’s FHA certifications, the reviews behind them and the resulting insurance losses. The broader mortgage evidence questions follow the records across underwriting, servicing and payment.

What CitiMortgage Admitted About FHA Loans

CitiMortgage admitted that it endorsed ineligible loans for Federal Housing Administration insurance and submitted certifications saying those loans were eligible. Its settlement admissions connect the underwriting failure to the insurance decision and the eventual loss: FHA insured loans it would otherwise have refused, and HUD incurred losses when those loans defaulted.

The admission identifies the document that carried the promise. For every loan it endorsed, CitiMortgage submitted Form HUD 92900-A or an equivalent loan-level certification. The certification told HUD that the loan qualified for FHA insurance, even though certain loans failed the underwriting requirements in HUD’s handbooks and mortgagee letters. The form gave the government an answer the underwriting did not support.

CitiMortgage also admitted missing required reviews of certain early payment defaults. The settlement defined those as loans that became 60 days past due within the first six payments. Those reviews were a chance to revisit a loan that had gone wrong almost immediately, while the underwriting file and the lender’s certification could still be compared with what happened after closing.

For an insider, the admissions put the loan file and the review process in the same story. A person who knew why a loan failed underwriting, or why its early default went unreviewed, could explain information missing from the certification HUD received. We start with that difference and follow it to the insurance claim.

Direct Endorsement Put the Decision Inside the Lender

Under the Direct Endorsement program described in the Justice Department’s announcement, CitiMortgage could originate, underwrite and endorse loans for Federal Housing Administration insurance without a pre-endorsement review by FHA or HUD. That delegated authority made the lender’s own underwriting and quality control central to the government’s decision to insure. CitiMortgage had participated in the program since 1981.

The arrangement also explains who stood behind the mortgage. The lender approved the loan for federal insurance. If the loan later defaulted, its holder could submit an insurance claim to HUD for the costs associated with the default. The underwriting decision happened inside the business, but the insurance claim reached the public purse.

The Justice Department described safeguards meant to accompany that authority: quality control independent of business operations, full reviews of early payment defaults, and disclosure to HUD of loans containing evidence of fraud or other serious underwriting problems. In its account of the requirements governing this case, those disclosures were due within 60 days of initial discovery. That reporting requirement gave the internal finding a destination outside the lender.

An independent review can reveal something the original underwriter missed. Its value also depends on what happens after the reviewer finds it: who receives the finding, whether the business changes it, and whether HUD learns about the problem. In CitiMortgage’s case, that passage from review to report became a central part of the Justice Department’s allegations.

The Alleged Campaign Against Adverse Findings

The Justice Department alleged that CitiMortgage’s business units routinely interfered with quality-control staff to reduce both the number and severity of reported defects. Its account of the government’s complaint described a direction to challenge every adverse finding. The announcement put the pressure this way:

In the Justice Department’s allegation, we see the business being reviewed trying to dictate the review’s answer. If you worked on those findings, the original defect, the challenge and the revised result would show what happened between the loan file and the reported rate. Quality control had acquired a quality-control problem of its own.

The Justice Department further alleged that CitiMortgage did not review approximately 1,000 potential-fraud cases referred by its quality-control unit. It said the lender did not report a single fraudulent loan it had underwritten until July 2011, shortly after receiving a subpoena from the U.S. Attorney’s Office. The alleged failure extended from findings that were challenged to referrals that went unreviewed and information that never reached HUD.

The same announcement alleged that CitiMortgage repeatedly failed to verify loan-file information bearing directly on borrowers’ ability to make their mortgage payments. It reported a default rate above 30% for loans originated or underwritten since 2004. For loans originated in 2006 and 2007, the reported default rate exceeded 47%.

The settlement admissions connect the underwriting failures to government money: ineligible loans received insurance because of false certifications, and HUD incurred losses when those loans defaulted. The original underwriting information explains why the certification mattered.

The FHA Settlement Had Its Own Money and Scope

The Justice Department described the settlement amount as damages under the False Claims Act. It joined the whistleblower’s case against CitiMortgage, a Citigroup subsidiary, and Citibank and Citigroup also agreed to the payment obligation. CitiMortgage made the loan certifications and the admissions about them.

This FHA resolution was additional to Citigroup’s commitments in the national mortgage-servicing settlement announced that month. The servicing deal left the Justice Department free to pursue underwriting fraud on government-insured loans. This case concerned putting ineligible loans into federal insurance and the certifications that got them there.

The Justice Department also asserted claims under the Financial Institutions Reform, Recovery, and Enforcement Act. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

What an Insider’s Loan and Review Records Can Show

An insider’s records can connect the underwriting decision, the finding that followed and the insurance claim HUD paid. The CitiMortgage admissions make that connection unusually concrete because the company accepted that false eligibility certifications led FHA to insure loans it otherwise would not have insured. The useful evidence follows the decisions inside that chain:

• The file at approval. The original underwriting information, unresolved conditions and authority to clear or waive them explain the decision behind the certification. The version used when the lender approved the loan matters.
• The early-default review. Delinquency history and the review population connect a loan to the review it required. The review file shows what quality control examined and what it found.
• The changed finding. Original findings, challenges, revised classifications and management recipients show how the review’s answer moved through the business. Reporting records then show what reached HUD.
• The insurance claim and loss. The certification, later claim, payment and reason for default connect the loan-level problem to government money. The underwriting and payment records complete different parts of that account.

A reviewer may know the original finding and who pressed to change it. An underwriter may know why a condition remained unresolved when the loan went forward. A person handling claims may see the payment side. We work with the part you know and connect it to the other decisions the case needs to explain.

MortgageIT Shows Why the Certifying Entity Matters

Deutsche Bank and MortgageIT reached a separate $202.3 million FHA settlement in May 2012 over false-certification and underwriting allegations, a larger settlement than CitiMortgage’s. MortgageIT had participated in Direct Endorsement before Deutsche Bank acquired it in 2007. That agreement distinguished MortgageIT’s conduct from the parent’s ownership period and set out admissions and acknowledgments specific to the different companies.

The comparison matters to someone who worked across a mortgage subsidiary and its parent. In CitiMortgage’s agreement, the subsidiary made the loan certifications and the specified admissions, while the settlement also bound the named parent companies. We follow who approved the loan, who received the warning and who certified eligibility, so the account of what happened stays attached to the business that did it.

When You Know Why the Finding Changed

If you saw a loan defect downgraded, an early-default review bypassed or a certification sent despite the file, speak with our whistleblower experts about why the finding changed. We work with you to build your strongest FHA mortgage fraud whistleblower case and bring in FHA mortgage fraud whistleblower lawyers who understand underwriting and quality-control evidence. You bring the view from inside the lender, and we stay beside you from the first conversation through the pursuit of a recovery.