Citigroup reverses plan to shrink mortgage business

Citigroup Inc., the bank 27 percent owned by the U.S. government, will ramp up purchases of mortgages underwritten by other firms and keep more loans on its balance sheet after reversing a plan to scale back home lending.

Citigroup has decided mortgages are a "core" product alongside consumer-banking staples savings accounts and credit cards, Sanjiv Das, who heads the New York-based lender's U.S. mortgage business, said today in an interview. Citigroup Chief Executive Officer Vikram Pandit shifted the CitiMortgage unit into a new Citi Holdings division in January 2009 along with other "non-core" businesses tagged for sale, wind-down or restructuring.

"In order to be a full-service consumer bank, we had to be able to offer mortgages to our customers" Das said. "Then, we said, let's now start to rebuild this business."

Losses on home loans and writedowns on mortgage-backed bonds helped saddle Citigroup with a record 2008 net loss of $27.7 billion, and the bank reduced residential lending to stanch further losses. Pandit said earlier this month he's looking for ways to spur growth in the consumer, corporate and investment-banking businesses he plans to keep.

Citigroup, which got a $45 billion taxpayer bailout in 2008, last year repaid $20 billion, and the Treasury converted the remaining $25 billion into 7.7 billion common shares. Pandit said earlier this month that the bank, whose net loss narrowed to $1.6 billion last year, is well-positioned to return to profitability, driving up the company's stock price. The Treasury's shares are now worth $30.5 billion.

To win more business, Das said he cut rates this week on "jumbo" loans -- those of more than $417,000 in most areas -- by one percentage point to 5.875 percent. The offer applies only for loans sold through branches and the bank's Web site, he said.

Some of the newly underwritten jumbo loans will be held on the bank's balance sheet, he said. Since the mortgage crisis hit, O'Fallon, Missouri-based CitiMortgage had mostly operated with an "originate-to-sell" strategy, where loans were sold to government-owned mortgage-finance companies including Fannie Mae and Freddie Mac.

In November, Citigroup Vice Chairman Edward "Ned" Kelly said the bank's "intention going forward" was "selling rather than retaining" new loans.

CitiMortgage also plans to double to about 300 the number of smaller banks and independent mortgage companies it's willing to buy loans from, Das said. Such companies, known as correspondent lenders, will be screened using a "scorecard" grading them on the performance of loans they previously sold to Citigroup, Das said.

Das reports jointly to Citi Holdings CEO Michael Corbat and Manuel Medina-Mora, whom Pandit named earlier this year to take over responsibility for Citigroup's North American consumer- banking business from Teresa "Terri" Dial.

Citigroup had $172.4 billion of North American home loans on its balance sheet as of Dec. 31, down 13 percent from a year earlier, according to its most-recent financial statement. In January, the company announced plans to transfer $34 billion of U.S. mortgages from Citi Holdings to Citicorp, the division that contains the businesses the bank is keeping.

Most of those loans are "pristine," Das said, meaning the borrowers have high credit scores and are current on payments and the value of the home exceeds the mortgage. Income from those loans will be counted in Citicorp's earnings, he said. The bank will continue to sell or wind down the "legacy" loans remaining in Citi Holdings, he said.

At the end of last year, 8.3 percent of the bank's North American mortgages were more than 90 days past due, compared with 2.2 percent at the end of 2007.

In June 2009, as delinquencies climbed, Citigroup suspended loan applications from correspondent lenders after a review found some property appraisals and income-verification documents were missing. The applications resumed in July, and the bank narrowed its customer list, Das said.

"We needed to shock the system," Das said. "I didn't just want to shock the internal system. I also wanted to make sure our correspondent customers understood we were very, very serious about quality."

Citigroup's correspondent lending fell to $3.32 billion in the fourth quarter from $23.2 billion in the second, according to Inside Mortgage Finance.

By the end of the year, the pace of new correspondent loans will almost be where it was last July, Das said.

Many correspondent lenders were turned off by Citigroup's loan suspension last year, said David Olson, president of Columbia, Maryland-based Access Mortgage Research & Consulting Inc. Some of the business was absorbed by Citigroup rivals Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co., he said.

Citigroup has "burned a lot of people, and now they're saying we want to be your friend," Olson said. "But memories are short. All they have to do is bring prices down, and people forget."