A decade after subprime mortgages tore through neighborhoods in Greater Cleveland and nationwide, another powerhouse bank is paying billions to settle with the government.
Citigroup will pay $7 billion to settle the Justice Department’s investigation into the bank’s history of approving subprime mortgages.
The agreement was announced this morning, weeks after Justice Department vowed to sue the nation’s third-largest bank if a settlement wasn’t reached. Citi was one of the largest originators of subprime loans in Northeast Ohio.
Citigroup will provide $2.5 billion for consumer relief, including reducing principal amounts for some homeowners, and financing for construction and preservation of affordable housing, by the end of 2018. Details about how homeowners can tap into that $2.5 billion should be announced soon.
Citi will also make a $4 billion civil monetary payment to the Justice Department and $500 million in compensatory payments to states and the Federal Deposit Insurance Corporation.
Subprime mortgages were the single biggest cause of the financial crisis of 2008 because the practice of rubberstamping loan applications falsely pushed up home prices until the bubble burst, and banks and everyday investors started losing money as loans went bad.
While mortgages with slightly higher rates are appropriate for borrowers with lower credit ratings or lower down payments, many banks cashed in on the subprime phenomenon by approving ridiculous loans. Thousands of loans were originated nationwide to people with little or no income in some cases. In others, loans were approved for amounts that were double or triple the actual value of the home.
Banks were able to survive participating in the practice because they made money from fees to originate the loans but generally sold the loans to investors before the loans went bad.
The financial crisis ultimately claimed the jobs of 9 million people nationwide, while 4.3 million homes were foreclosed on from 2008 to 2012. People saving for retirement lost half of their wealth in 18 months.
Locally, two of Cleveland’s four largest banks, National City and Ohio Savings/AmTrust, collapsed because of subprime loans. Nationwide, nearly 500 banks failed over a five-year period, after only 25 had failed in the previous seven years.
JPMorgan Chase reached a $13 billion settlement late last year over its role in subprime mortgages. Bank of America is reportedly in the process of negotiating a settlement as well.
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