Mortgage investors sue Citi over underwriting

By Reuters
Posted Nov. 5, 2010 at 10:41 a.m.

Several Citigroup Inc. mortgage bond investors, including Charles Schwab Corp. and hedge fund Cambridge Place Investment Management, have sued the bank over its home loan underwriting processes, according to a regulatory filing on Friday.

The investors, which also include the Federal Home Loan Banks of Chicago and Indianapolis, filed lawsuits against Citigroup starting in July, Citigroup said in the filing with the U.S. Securities and Exchange Commission.

The lawsuits allege “actionable misstatements or omissions in connection with the issuance and underwriting of residential mortgage-backed securities,” Citigroup said, adding that the investors “are seeking rescission of their investments or other damages.”

Several large banks are facing pressure to repay investors for soured mortgages that the banks bundled into bonds and sold.

Charles Schwab in July sued Citigroup and several other banks over losses on its $1.38 billion investment in 36 mortgage-related securitizations.

In the lawsuit, which is now pending in the U.S. District Court in San Francisco, Schwab said the banks misled it about the risks of tens of thousands of the underlying loans.

“The poor performance of the loans in these pools demonstrates that the originators departed extensively from their underwriting guidelines when making these loans,” Schwab alleged.

Cambridge Place’s lawsuit, filed in July, is seeking to recoup $1.2 billion it lost on subprime mortgages. The hedge fund’s claim named Citigroup and other major banks, including Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co.

The Federal Home Loan Banks of San Francisco and Seattle have also sued Wall Street banks to rescind billions of dollars in mortgage bonds.

Citigroup said in its filing on Friday that the mortgage investors’ lawsuits are in “preliminary stages” and that it could not currently estimate the potential losses, if any, it could face from them.

The bank’s shares were up 3.0 percent at $4.40 in morning trading.

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