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United States’ third largest bank Citigroup, Inc. (C - Analyst Report) is on shaky grounds again as it has been sued by U.S. Bancorp (USB - Analyst Report) in connection with the sale of securities that were allegedly backed by low-quality mortgages. The mortgage backed securities (MBS) were worth $1.08 billion.

These securities were backed by 4,946 mortgage loans. U.S. Bank has accused Citi of violating the contract with the buyers of the securities. U.S. Bank is seeking compensation for the damages, though no amount has been specified. Moreover, it seeks to obtain an order requiring Citi to repurchase the faulty loans.

As per the trustee, the loans carried a high default rate. Due to this, U.S. Bank incurred losses of over $354 million. Further, a forensic review was done on 1,604 of the mortgages underlying the 2007 investment. The review disclosed that approximately 79% of the loans became delinquent.

Similar Charges Earlier

Washington Mutual Inc. – acquired by JPMorgan Chase & Co. (JPM - Analyst Report) in 2008 – and Citigroup have been legally charged in connection with issues arising out of the sale of MBS by Integer Program LLC for incurring huge losses from mortgage loans.

Further, many other global giants, including Morgan Stanley (MS - Analyst Report), are battling similar lawsuits related to MBS.

Our Take

The mounting litigation charges against Citi are expected to exhaust its financial resources, which otherwise could have been channeled toward the company’s growth initiatives. Moreover, it is apprehended that litigation overhangs might tarnish the company’s image.

Citi currently carries a Zacks Rank #3 (Hold).

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