Citibank 2010 Annual Report Download - page 115

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Securities and Banking-Sponsored Private Label Residential
Mortgage Securitizations—Representations and Warranties
Over the years, S&B has been a sponsor of private-label mortgage-backed
securitizations. Mortgage securitizations sponsored by Citi’s S&B business
represent a much smaller portion of Citi’s mortgage business than Citi’s
Consumer business discussed above.
During the period 2005 through 2008, S&B sponsored approximately
$66 billion in private-label mortgage-backed securitization transactions,
of which approximately $28 billion remained outstanding at December 31,
2010. These outstanding transactions are backed by loan collateral composed
of approximately $7.4 billion prime, $5.9 billion Alt-A and $14.3 billion
subprime residential mortgage loans. Citi estimates the actual cumulative
losses to date incurred by the issuing trusts on the $66 billion total
transactions referenced above have been approximately $6.7 billion.
The mortgages included in these securitizations were purchased from
parties outside of S&B, and fewer than 3% of the mortgages currently
outstanding were originated by Citi. In addition, fewer than 10% of the
currently outstanding mortgage loans underlying these securitization
transactions are serviced by Citi. The loans serviced by Citi are included in
the $456 billion of residential mortgage loans referenced under “Consumer
Mortgage Representations and Warranties” above. (Citi acts as master
servicer for certain of the securitization transactions.)
In connection with such transactions, representations and warranties
(representations) relating to the mortgage loans included in each trust
issuing the securities were made either by (1) Citi, or (2) in a relatively small
number of cases, third-party sellers (Selling Entities, which were also often
the originators of the loans). These representations were generally made or
assigned to the issuing trust.
The representations in these securitization transactions generally related to,
among other things, the following:
the absence of fraud on the part of the mortgage loan borrower, the seller •฀
or any appraiser, broker or other party involved in the origination of the
mortgage loan (which was sometimes wholly or partially limited to the
knowledge of the representation provider);
whether the mortgage property was occupied by the borrower as his or her •฀
principal residence;
the mortgage loan’s compliance with applicable federal, state and local laws;•฀
whether the mortgage loan was originated in conformity with the •฀
originator’s underwriting guidelines; and
the detailed data concerning the mortgage loans that was included on the •฀
mortgage loan schedule.
The specific representations relating to the mortgage loans in each
securitization may vary, however, depending on various factors such as the
Selling Entity, rating agency requirements and whether the mortgage loans
were considered prime, Alt-A or subprime in credit quality.
In the event of a breach of its representations, Citi may be required either to
repurchase the mortgage loans with the identified defects (generally at unpaid
principal balance plus accrued interest) or indemnify the investors for their losses.
For securitizations in which Citi made representations, these
representations typically were similar to those provided to Citi by the Selling
Entities, with the exception of certain limited representations required by
rating agencies. These latter representations overlapped in some cases with
the representations described above.
In cases where Citi made representations and also received those
representations from the Selling Entity for that loan, if Citi is the subject of a
claim based on breach of those representations in respect of that loan, it may
have a contractual right to pursue a similar (back-to-back) claim against
the Selling Entity. If only the Selling Entity made representations, then
only the Selling Entity should be responsible for a claim based on breach of
these representations in respect of that loan. (This discussion only relates to
contractual claims based on breaches of representations.)
However, in some cases where Citi made representations and received
similar representations from Selling Entities, including a majority of such
cases involving subprime and Alt-A collateral, Citi believes that those Selling
Entities appear to be in bankruptcy, liquidation or financial distress. In those
cases, in the event that claims for breaches of representations were to be
made against Citi, the Selling Entities’ financial condition may effectively
preclude Citi from obtaining back-to-back recoveries against them.
To date, S&B has received only a small number of claims based
on breaches of representations relating to the mortgage loans in these
securitization transactions. Citi continues to monitor closely this claim
activity relating to its S&B mortgage securitizations.
In addition to sponsoring residential mortgage securitization transactions
as described above, S&B engages in other residential mortgage-related
activities, including underwriting of residential mortgage-backed securities.
S&B participated in the underwriting of these S&B-sponsored securitizations,
as well as underwritings of other residential mortgage-backed securities
sponsored and issued by third parties.
For additional information on litigation claims relating to these activities,
see Note 29 to the Consolidated Financial Statements.