Citigroup Settlement Offers Former Homeowners 'Cold Comfort'
Should you be watching your mailbox for a check from Citigroup?
The banking giant says it will pay out $2.5 billion to provide "consumer relief" to help settle charges brought against it by the U.S. Justice Department. The government said Monday that "defects" in Citi's mortgage securities had fueled the financial crisis that triggered the Great Recession.
And we all suffered from that catastrophe. Between 2007 and 2009, U.S. households lost more than $19 trillion in wealth.
Given that staggering sum, a $2.5 billion payout to consumers may seem small. But surely the people who lost homes purchased with Citi mortgages will get some cash back, won't they?
No. For people who ended up in foreclosure, the settlement will not bring back the old house keys.
"There's nothing Citi will do to help those people," said Lisa Gilbert, a settlement critic with Public Citizen, a nonprofit group.
To understand why homeowners — who lost the most — are getting the least, we need to take this story in order.
Chapter 1: The Run-Up To A Crisis
From 2003 to 2007, housing prices were shooting up. In that go-go environment, banks made lots of loans and bundled them into "mortgage-backed securities," which could be sold to investors seeking interest income.
Many lenders began marketing mortgages to borrowers with poor credit records or insufficient incomes. And in many cases, loans were designed to lure buyers with affordable "teaser" interest rates, which later would ratchet up to higher rates.
The DOJ says Citi misled investors about the risks inherent in these mortgages. And Cornell law professor Robert Hockett said borrowers too were being misled about how their mortgages would get more and more expensive over time. "They weren't being told about the fine print," he said.
So by 2007, many homeowners were starting to default, dumping vacant houses on the market. That drove down real estate prices and kicked off the housing market meltdown.
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