Citibank 2010 Annual Report Download - page 112

110
Consumer Mortgage Representations and Warranties
The majority of Citi’s exposure to representation and warranty claims relates
to its U.S. Consumer mortgage business.
Representation and Warranties
As of December 31, 2010, Citi services loans previously sold as follows:
In millions December 31, 2010 (1)
Vintage sold:
Number
of loans
Unpaid
principal balance
2005 and prior 1.0 $105,931
2006 0.2 34,969
2007 0.2 43,744
2008 0.3 53,759
2009 0.3 60,293
2010 0.3 54,936
Indemnifications (2) 0.9 102,142
Total 3.2 $455,774
(1) Excludes the fourth quarter of 2010 sale of servicing rights on 0.1 million loans with unpaid principal
balances of approximately $28,745 million. Citi continues to be exposed to representation and
warranty claims on those loans.
(2) Represents loans serviced by CitiMortgage that are covered by indemnification agreements relating to
previous acquisitions of mortgage servicing rights.
In addition, since 2000, Citi has sold $94 billion of loans to private
investors, of which $49 billion were sold through securitizations. As of
December 31, 2010, $39 billion of these loans (including $15 billion sold
through securitizations) continue to be serviced by Citi and are included in
the $456 billion of serviced loans above.
When selling a loan, Citi (through its CitiMortgage business) makes
various representations and warranties relating to, among other things, the
following:
Citi’s ownership of the loan;•฀
the validity of the lien securing the loan;•฀
the absence of delinquent taxes or liens against the property securing the loan;•฀
the effectiveness of title insurance on the property securing the loan;•฀
the process used in selecting the loans for inclusion in a transaction;•฀
the loan’s compliance with any applicable loan criteria established by the •฀
buyer; and
the loan’s compliance with applicable local, state and federal laws.•฀
The specific representations and warranties made by Citi depend on
the nature of the transaction and the requirements of the buyer. Market
conditions and credit-rating agency requirements may also affect
representations and warranties and the other provisions to which Citi may
agree in loan sales.
Repurchases or “Make-Whole” Payments
In the event of a breach of these representations and warranties, Citi
may be required to either repurchase the mortgage loans (generally
at unpaid principal balance plus accrued interest) with the identified
defects, or indemnify (“make-whole”) the investors for their losses. Citi’s
representations and warranties are generally not subject to stated limits in
amount or time of coverage. However, contractual liability arises only when
the representations and warranties are breached and generally only when a
loss results from the breach.
For the years ended December 31, 2010 and 2009, 77% and 64%,
respectively, of Citi’s repurchases and make-whole payments were attributable
to misrepresentation of facts by either the borrower or a third party (e.g.,
income, employment, debts, FICO, etc.), appraisal issues (e.g., an error or
misrepresentation of value), or program requirements (e.g., a loan that does
not meet investor guidelines, such as contractual interest rate). To date, there
has not been a meaningful difference in incurred or estimated loss for each
type of defect.
In the case of a repurchase, Citi will bear any subsequent credit loss on
the mortgage loan and the loan is typically considered a credit-impaired
loan and accounted for under SOP 03-3, “Accounting for Certain Loans and
Debt Securities, Acquired in a Transfer” (now incorporated into ASC 310-30,
Receivables—Loans and Debt Securities Acquired with Deteriorated Credit
Quality). These repurchases have not had a material impact on Citi’s non-
performing loan statistics because credit-impaired purchased SOP 03-3 loans
are not included in non-accrual loans, since they generally continue to accrue
interest until write-off.
The unpaid principal balance of loans repurchased due to representation
and warranty claims for the years ended December 31, 2010 and 2009,
respectively, was as follows:
Year ended December 31,
2010 2009
In millions of dollars
Unpaid principal
balance
Unpaid principal
balance
GSEs $280 $268
Private investors 26 22
Total $306 $290
As evidenced in the table above, to date, Citi’s repurchases have primarily
been from the U.S. government sponsored entities (GSEs). In addition, Citi
recorded make-whole payments of $310 million and $49 million for the
years ended December 31, 2010 and 2009, respectively.