Did you hear about the Whistle-Blower who stands to gain $31 million for providing evidence that Citigroup "defrauded" Fannie and Freddie?  Sherry Hunt, a Citigroup quality-assurance vice president turned in evidence of purposeful fraud against Fannie Mae and Freddie Mac and may soon be able to retire comfortably.  Or buy a chunk Citigroup.

Zero Sum Game. And because we hear that we live in a "Zero Sum" world - where there's a loser for every winner - we think we have a pretty good idea of who lost against the Whistle-Blower's gain.  Correct - Citigroup - although its loss currently stands at $153 million - which greatly exceeds Ms. Hunt's bounty.  Hmmm, wonder who the other winner might be.

Citigroup Inc. last week admitted to breaking Federal Housing Administration rules and it paid a fine.  But the bank also violated regulations for home loans sold to Fannie Mae and Freddie Mac, according to a whistle-blower's complaint.  In fact, Citigroup "defrauded, falsified information or misled federal government entities" by selling or securing insurance for mortgages with defects such as improper appraisals and not reporting them as required, Ms. Hunt said in her complaint, which was unsealed yesterday.  It was filed under the False Claims Act in federal court in Manhattan in August.

Hunt's charges formed the backbone of the U.S. Justice Department's case against Citigroup, which paid $158.3 million in a 2/15/12 settlement and admitted that it certified loans for FHA insurance that didn't qualify. Her complaint provides additional details into the bank's broken mortgage-processing system. In last week's agreement, the government reserved the right to pursue criminal and other charges related to mortgages originated or underwritten by Citigroup and not insured by the FHA.

As a whistle-blower, Ms. Hunt's share of the settlement will be $31 million before taxes and attorney's fees, she said in a February 15 interview.

More Potential Losses In Store For Citigroup. For the 3rd-largest U.S. bank, it may find the high defect rates costly - i.e., it might be forced to buy back substandard mortgages sold to government-controlled Fannie and Freddie, who buy or guarantee most U.S. mortgages.

Last year, Citigroup repurchased 6,600 loans from government buyers, an 89% increase from 2010, according to a presentation on its website.  The bank set aside $1.2 billion to buy back defective mortgages as of the end of 2011.  That's the most ever, and up from $969 million in 2010.

Hunt said Citigroup knowingly vouched for the quality of loans that were "deficient" in income documentation, had incomplete borrower job histories, appraisal problems, errors in closing paperwork, missing credit reports and miscalculated maximum mortgage amounts, among other flaws.

Some managers' compensation was tied in part to reducing the defect rate, Hunt said.

For certain types of home loans, Citigroup's "defect rate" -- the rate at which the underwriting raised questions -- was 80 percent, said Hunt, 54.

Taxpayers are on the hook for over $180 billion in bailouts to Fannie and Freddie. Citigroup got off the hook with a $158.3 million fine, of which Hunt gets a bonanza jackpot of $31 million.

Meanwhile, fraud is everywhere, and no one has gone to prison or held remotely accountable.

[Mike "Mish" Shedlock, 2/22/12].