Let's say you decide to try to jump the Grand Canyon on a dirt bike. You fail miserably, sustain significant injuries, and nearly die. Do you get back on your motorcycle after you recover and try again? Apparently, Citigroup would. After being one of many banks that foolishly originated terrible mortgaged doomed to fail, which helped to trigger a nasty financial crisis and nearly caused the firm to fail, it's back at the game. Has the bank learned nothing?
Three years after bad home loans helped trigger the recession and six weeks after the government cashed in the last of its $45 billion Citigroup investment, the New York-based bank is still selling mortgages that violate quality standards, according to an internal Freddie Mac review obtained by Bloomberg.
Fifteen percent of the performing loans Citigroup sold to the government-owned mortgage-finance company in the second half of 2009 and the first half of 2010 had such flaws as missing appraisals or insurance documents or income miscalculations, according to the review of 375 mortgages. The target for defects should be about 5 percent, said Tim Rood, a former executive with Freddie's sister agency, Fannie Mae, and now managing director at Washington-based advisory firm Collingwood Group LLC.
This is pretty mind-boggling. After nearly failing due to its exposure to bad mortgages, Citi is still originating lots more mortgages without proper documentation.
And Freddie is still backing those mortgages.But presumably, Freddie will force Citi to buy back these loans, if that lack of documentation allows the company to demand it. That will force the losses back to Citi, where they belong.
Of course, this leaves us with the question: what the heck is going on at Citi? Before the housing bubble popped, perhaps the bank had naïve dreams that either these loans would ultimately be okay because home prices could only go up or that Freddie would get stuck with any losses. Now it knows that such poorly originated mortgages often go bad and that Freddie will demand the bank repurchase loans that fail to conform to its standards. So what's its excuse now? The bank may be plagued with some serious operational issues. In the Bloomberg article, banking industry expert Christopher Whalen suggests that "Citigroup is having significant problems with internal systems and controls" in its mortgage pipeline.
It's important to note that these findings concern a very small portion of Citi's overall portfolio. The fear, however, is that they hint at a bigger problem at the firm. Frankly, fixing its mortgage underwriting practices should have been the first thing Citi did after housing bubble popped in 2007. It's hard to understand how such an obvious priority could have slipped through the cracks.