Top Citigroup executives sought to assure investors and the public Monday that the firm's foreclosure process and its handling of key documents in securitizing home mortgages is "sound," despite growing concerns over how lenders may have skirted the law when bundling home mortgages, selling them and kicking delinquent borrowers out of their home.
The nation's biggest banks have come under increased scrutiny over the past few weeks as revelations surfaced over how they routinely mishandled basic documents like the note to the property in their rush to securitize loans for sale on Wall Street. These came to light as bank employees and those of contractors and law firms employed by the banks to repossess homes admitted to carelessly handling mounds of paper. It may have seemed trivial at the time, but it may have been against the law. The validity of claims to properties has been called into question over false notaries, failing to read documents before signing them, and omitting names when transferring documents just to make it easier to securitize the loan.
In response, some of the nation's biggest mortgage servicers, like Bank of America, JPMorgan Chase and Ally Financial, announced temporary moratoriums on foreclosure sales. For the first time in the long fight between aggrieved homeowners and rapacious bankers since the onslaught of the housing crisis, the homeowners appear to be winning.
It was under these circumstances that John Gerspach, Citi's chief financial officer, sought to assuage analysts who have quantified possible losses arising from this fiasco in the billions to the hundreds of billions.
"[R]egarding foreclosures, as we have been saying publicly, we continuously view our document handling procedures and we believe the integrity of Citi's foreclosure process is sound," Gerspach said during a conference call with analysts, investors and journalists. "While we use external attorneys to prepare documents, each package is reviewed by a Citi employee who verifies the information and signs the foreclosure affidavit in the presence of a notary. When errors are found, the documents are returned to the attorney who revises the package and resubmits the documents for review."
"We have intensified our ongoing process reviews and ... have not identified any systemic issues," he added.
Other lenders and servicers face accusations that they employed so-called "robo-signers" whose sole job was to sign thousands of documents a day, each time attesting to carefully reviewing each one in compliance with the law. Presented with evidence, some judges have ruled that planned foreclosures couldn't go through. Others have said that the transfer of documents bordered on the illegal and refused to recognize parties' right to foreclose.
Citi executives say they didn't do that, and thus won't be affected. Analysts were relieved.
"It sounds as though they have avoided that issue," said Jeffery Harte, a managing director at Sandler O'Neill & Partners, L.P. who analyzes big banks and prominent securities firms. "They were pretty direct in saying, 'We don't have a robo-signing issue.'"
Harte found it interesting given Citi's history of missteps.
"If you go back historically, Citigroup has found itself in the midst of a lot of differnet issues," the top-ranked analyst said. "For them to have potentially sidestepped something, when it happens to be the first real issue that came under [CEO] Vikram Pandit's watch, so it's not so much a legacy thing but something directly under Vikram, I think is a vote of confidence that the management attitude has kind of changed."
But Citi, still partly owned by taxpayers, faces other hurdles surrounding its past mortgage activities. Namely, the bank faces uncertainty regarding the ultimate impact of the many soured mortgages it will likely have to buy back.
In selling mortgages, the originators make certain claims that, when found to be false, open up an avenue for the buyer to force the seller to take it back or make them whole.
Citi, the nation's third-largest bank by assets, said Monday that it has received 7,200 such claims this year from buyers of their mortgages. Just 300 of those loan requests came from private investors; the rest came from government-owned mortgage giants Fannie Mae and Freddie Mac.
Since 2008 buyers of Citi mortgages have requested that Citi take back 17,500 poor mortgages or cover the buyers' losses. Including this year's loans, about a quarter of those requests remain outstanding, Gerspach said.
The bank said that's out of about 3.5 million loans it likely originated and sold to investors and Fannie and Freddie. Those loans have a balance of about $504 billion, the bank said, which Gerspach noted "best represents our outstanding loan originations held by third parties." About a third of that, or $166 billion, are loans in which Citi has liability if errors are found, and which were originated from 2006 to 2008 -- the height, end and aftermath of the housing boom. They also generate the "bulk" of mortgage buyers' demands for repurchases.
Of the 12,800 loan requests the bank has resolved, in about half the cases Citi was forced to either repurchase the loan or make the buyer whole on their losses, Gerspach said.
The numbers are likely to get worse.
Already, claims through nine months this year have eclipsed last year's total by nine percent, with all of that increase coming from a resurgent federal regulator who's trying to ensure that taxpayers aren't the only ones left holding the bag when it comes to Fannie and Freddie's reckless behavior.
Also, the bank, like others, faces increased risk because of the microscope its practices have been put under. With bank and securities regulators looking into the megabanks' documentation practices when it comes to foreclosures, and all 50 state attorneys general launching a joint investigation into the same thing -- during an election year -- some analysts say the immediate investigation could easily morph into one that examines the entire chain of documentation, from origination through securitization.
So borrowers' income, credit score, other outstanding debts -- information on the original mortgage application that helps sellers of mortgages price them for investors -- could now all be checked to make sure the original lender didn't falsify anything or willingly ignore its falsification.
Essentially, investigators could pore over lenders' underwriting files.
That the fears are real suggest that either lenders often disregarded the rules, or that the threat of such an investigation is so strong that big banks will spend lots of time and money defending themselves against a multitude of inquiries or simply agree to an expensive settlement.
One analyst on Monday's call, James F. Mitchell of Buckingham Research Group, brought this up.
"[P]eople are worried about not just the documentation issue but the poor quality of the underwriting of the loans," Mitchell said about Citi's loans that were ultimately securitized and sold. "Does that somehow ... break the representation and warranties in the prospectus, and therefore investors can put the whole securitization back, not just on documentation but on loan quality issues? Did you have a discussion with your counsel on that?"
Gerspach, Citi's chief financial officer, responded.
"We had several counsels. I couldn't find anyone that indicated that there was this big red button that gets pushed and completely blows up a transaction based upon underwriting quality," Gerspach said. "But I'm going to leave that one up to all the lawyers in the world to argue about," he added, dodging the larger question about Citi's underwriting practices.
Against that backdrop, Citi increased the amount of money it sets aside to handle repurchase requests from investors and Fannie and Freddie. It now has $952 million reserved to fund the fulfillment of those repurchase requests, up 31 percent from June 30 and 223 percent from this time last year.
Citi has originated $653.2 billion in home mortgages since the start of 2005, a review of the lender's quarterly earnings announcements show. It was holding $131.5 billion in mortgages on its balance sheet as of Sept. 30. The remaining $522 billion was sold and securitized, the bank's standard practice when it comes to home mortgages, it said in its last annual federal regulatory filing with the Securities and Exchange Commission.
Because the bank has lost about $211 million thus far this year from repurchase requests, and it has $952 million set aside, or more than four times as much, "it would appear they've got a pretty big reserve set up," Harte said.
The Sandler O'Neill analyst added that he found it reassuring especially considering that the bank didn't buy a "less pristine" lender like its peers. JPMorgan Chase bought Washington Mutual, Bank of America took over Countrywide Financial, PNC bought National City, and Wells Fargo bought Wachovia (which was hobbled by its purchase of Golden West, a California-based lender whose mortgages proved to be especially toxic). Those banks now face substantial demands given the kind of loans the likes of WaMu and Countrywide churned out in inflating the housing bubble.
But because Citi didn't buy such a lender, it should be better off.
Harte said he thought Citi may ultimately have to repurchase about $1.5 billion in bad loans. He added that he could easily double that estimate if he were more aggressive in his assumptions.
Citi declared net income of about $2.2 billion in the three-month period ending in September. The bailed-out bank -- a beneficiary of tens of billions of dollars in direct investment by taxpayers, asset and debt guarantees totaling in the hundreds of billions, an assortment of other federal programs designed to shield big banks from losses, and the Federal Reserve's easy-money policy of near-zero percent interest rates -- has turned a profit every quarter this year.
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