Citibank 2011 Annual Report Download - page 110

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Consumer Mortgage—Representations and Warranties
The majority of Citi’s exposure to representation and warranty claims relates
to its U.S. Consumer mortgage business within CitiMortgage.
CitiMortgage Servicing Portfolio
As of December 31, 2011, Citi services loans previously sold to the U.S.
government sponsored entities (GSEs) and private investors as follows:
In millions December 31, 2011 (1)
6INTAGEæSOLDNumber of loans
Unpaid
principal balance
æANDæPRIOR 1.4 $141,122
 0.3 43,040
 0.2 40,080
 0.3 39,279
 0.2 45,811
 0.2 40,474
 0.2 46,501
Total 2.8 $396,307
æ %XCLUDESæTHEæFOURTHæQUARTERææSALEæOFæSERVICINGæRIGHTSæONææMILLIONæLOANSæWITHæREMAININGæUNPAIDæ
PRINCIPALæBALANCESæOFæAPPROXIMATELYææMILLIONæASæOFæ$ECEMBERæææ#ITIæCONTINUESæTOæBEæ
EXPOSEDæTOæREPRESENTATIONæANDæWARRANTYæCLAIMSæONæTHESEæLOANS
æ )NCLUDESææMILLIONæLOANSæWITHæREMAININGæUNPAIDæPRINCIPALæBALANCEæOFæAPPROXIMATELYææMILLIONæ
ASæOFæ$ECEMBERæææTHATæAREæSERVICEDæBYæ#ITI-ORTGAGEæPURSUANTæTOæPRIORæACQUISITIONSæOFæMORTGAGEæ
SERVICINGæRIGHTSæ4HESEæLOANSæAREæCOVEREDæBYæINDEMNIFICATIONæAGREEMENTSæFROMæTHIRDæPARTIESæINæFAVORæOFæ
#ITI-ORTGAGEæHOWEVERæSUBSTANTIALLYæALLæOFæTHESEæAGREEMENTSæWILLæEXPIREæPRIORæTOæ-ARCHæææ4HEæ
EXPIRATIONæOFæTHESEæINDEMNIFICATIONæAGREEMENTSæISæCONSIDEREDæINæDETERMININGæTHEæREPURCHASEæRESERVE
As previously disclosed, during the period 2005 through 2008, Citi
sold approximately $25 billion of loans through private-label residential
mortgage securitizations. As of December 31, 2011, approximately $11 billion
of the $25 billion remained outstanding as a result of repayments of
approximately $13 billion and cumulative losses (incurred by the issuing
trusts) of approximately $1 billion. The remaining $11 billion outstanding is
included in the $396 billion of serviced loans above. As of December 31, 2011,
the amount that remained outstanding had a 90 days or more delinquency
rate in the aggregate of approximately 12.9%. For information on litigation
related to these and other Citi securitization activities, see “Securities and
Banking-Sponsored Private-Label Residential Mortgage Securitizations—
Representations and Warranties” below and Note 29 to the Consolidated
Financial Statements.
Representations and Warranties
When selling a loan, Citi 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 with the identified defects
(generally at unpaid principal balance plus accrued interest) 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.
Similar to 2010, during 2011, issues related to (i) misrepresentation
of facts by either the borrower or a third party (e.g., income, employment,
debts, FICO, etc.), (ii) appraisal issues (e.g., an error or misrepresentation
of value), and (iii) program requirements (e.g., a loan that does not meet
investor guidelines, such as contractual interest rate) have been the primary
drivers of Citi’s repurchases and make-whole payments. However, the type of
defect that results in a repurchase or make-whole payment has continued
and will continue to vary over time. More importantly, there has not been a
meaningful difference in Citi’s incurred or estimated loss for any particular
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.