In an effort to settle a lawsuit with investors related to mortgage-backed securities, Citigroup Inc. (C) has agreed to pay $24.9 million, according to a Reuters report. The investors claimed that Citi had presented misleading facts regarding the mortgage-backed securities, which the company sold prior to the bursting of the housing bubble.
The lawsuit was led by the Ann Arbor Employees’ Retirement System and Greater Kansas City Laborers Pension Fund, on behalf of the investors. Notably, according to the report, in 2007, the certificates were bought by investors in one of the two mortgage-backed securities trusts from Citigroup Mortgage Loan Trust, Inc.
As per the allegations put forward by the investors, in times of the subprime mortgage boom, Citi did not disclose the falling standards for mortgage underwriting and appraisal. Moreover, the default risk was also been suppressed. Therefore, when the underlying mortgage defaulted, these securities lost their value and the investors suffered.
Notably, according to the report which cited court documents, Citi’s settlement amount includes around $13.25 per $1,000 in initial face value of the two trusts specified in the suit and would amount to about $1.88 billion.
The Back Story
As a matter of fact, the mortgage loans were pooled together, securitized and sold to investors. They constituted a significant part of the housing bubble. So when the bubble burst, it sent the economy clambering. These securities suffered severe losses and ultimately their market dried up.
The investors incurred billions of losses on such securities and have accused the sellers on grounds of fraud for not making adequate disclosures about the risks associated with investments on such securities. This resulted in several lawsuits against the biggest Wall Street firms by investors. Moreover, the companies had to confront the wrath of the regulators and are facing several investigations as well as penalties.
Our Take
Settling these charges would fundamentally hurt Citi’s funds, but simultaneously lessen the company’s litigation overhang to some extent. However, the money could have been capitalized towards the company’s growth initiatives, had it not been subject to such litigations. On the other hand, the investors can now breathe a sigh of relief as the settlement amount can now be well utilized.
However, Citi is not the only one to settle such charges. Others, like Deutsche Bank AG (DB) as well as Bank of America Corp. (BAC), struck a similar cord with investors and agreed to pay millions for settling such litigations in the past.
Citi otherwise boasts an impressive global footprint and attractive core business. A low interest rate environment, regulatory headwinds and litigation risks remain our concerns.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock.
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