Trustees Ask for Extension on Citigroup's $1.13 Billion Mortgage Settlement

By Christina Rexrode 

Citigroup Inc.'s mortgage securities settlement isn't proceeding as quickly as the company would like.

The trustees involved in Citigroup's $1.13-billion settlement with private investors said they need an extension to decide whether they should approve the pact.

Citigroup announced the settlement in April with 18 investors, including BlackRock Inc.'s BlackRock Financial Management Inc., the Federal Home Loan Bank of Atlanta, Goldman Sachs Group Inc.'s asset management unit and Pacific Investment Management Co.

The investors said in a news release at the time that they supported the deal, which settled claims they had been misled over the quality of 68 trusts, which issued some $59 billion of residential mortgage-backed securities that Citigroup sold from 2005 to 2008.

But the trustees who work for those investors aren't moving quickly. The settlement gave the trustees until June 30 to accept the offer, with the option to extend the deadline 45 days. Late Wednesday, the trustees posted a notice saying they would exercise the right to that delay, which now gives them a deadline of Aug. 14.

The trustees basically serve as administrators for investors in a structured deal such as a mortgage-backed security. Their roles include maintaining records and distributing payments.

The notice, which was signed by trustees including Deutsche Bank National Trust Company, HSBC Bank USA N.A. and U.S. Bank N.A., said the trustees were still reviewing the proposed settlement and had not made any decisions about "the reasonableness of, or the advisability of accepting" the proposed settlement.

The relationship between investors and the trustees that assist them can be complicated. BlackRock and Pimco last week sued six trustees, including HSBC and U.S. Bank, for failing to fulfill their role in overseeing the servicing of loans in some $2 trillion in mortgage-backed securities. The investors claim that trustees have ignored "pervasive" signs of flawed mortgages, which should have resulted in the repurchase of loans at full value from the bonds. The investors also argue that the trustees have a fiduciary duty to their investors. Trustees have argued that their responsibilities are far narrower than what some investors believe, however.

The lawsuit against the trustees, and the trustees' decision to ask for an extension as they decide whether to accept the Citigroup proposed settlement, were first reported by The Wall Street Journal.

Citigroup and other big banks are eager to convince investors that their legal troubles are coming to an end, while the government has pushed to prove that it is being tough on the banking industry in the wake of the financial crisis.

Citigroup is in the midst of negotiating a mortgage-securities settlement with the Justice Department, though the two sides remain far apart on how much Citigroup should have to pay. The Justice Department has sought roughly $10 billion, while Citigroup has offered about $4 billion, The Wall Street Journal reported this month. Bank of America is also wading through Justice Department settlement negotiations, while J.P. Morgan Chase & Co. settled a group of related cases in November for $13 billion.

There is reason to be cautious in pronouncing any settlement to be the final word in crisis-era cases. Private investors agreed to an $8.5 billion settlement with Bank of America Corp. in 2011, with Bank of New York Mellon Corp. acting as trustee. But some of the investors, including American International Group Inc., protested, saying Bank of New York should have brokered a better deal. After a prolonged court battle, a judge approved most of the settlement this year.

AIG isn't an investor in the trusts included in the Citigroup settlement.

Private investors also agreed to a $4.5 billion mortgage-backed securities settlement with J.P. Morgan in November, though the trustees in that settlement have yet to offer their final approval. They were originally supposed to approve the deal by Jan. 15, but they have asked for several extensions and now face a deadline of Aug. 1.

The investors in all three cases have been represented by the Houston law firm Gibbs & Bruns. A Citigroup spokeswoman declined to comment.

Al Yoon contributed to this article.

Write to Christina Rexrode at [e-mail]

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