Citibank 2011 Annual Report Download - page 113

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Securities and Banking-Sponsored Legacy Private-Label
Residential Mortgage Securitizations—Representations and
Warranties
Overview
Citi is also exposed to representation and warranty claims through residential
mortgage securitizations that had been sponsored by Citi’s S&B business.
However, S&B-sponsored legacy securitizations have represented a much
smaller portion of Citi’s business than Citi’s Consumer residential mortgage
business discussed above.
As previously disclosed, during the period 2005 through 2008, S&B had
sponsored approximately $66.5 billion in legacy private-label mortgage-
backed securitization transactions that were backed by loan collateral
composed of approximately $15.5 billion prime, $12.4 billion Alt-A and
$38.6 billion subprime residential mortgage loans. As of December 31,
2011, approximately $23.4 billion of this amount remains outstanding
as a result of repayments of approximately $34.5 billion and cumulative
losses (incurred by the issuing trusts) of approximately $8.7 billion (of
which approximately $6.6 billion related to subprime loans). Of the amount
remaining outstanding, approximately $6.1 billion is backed by prime
residential mortgage collateral at origination, approximately $4.9 billion by
Alt-A and approximately $12.3 billion by subprime. As of December 31, 2011,
the $23.4 billion remaining outstanding had a 90 days or more delinquency
rate of approximately 27.2%.
The mortgages included in these securitizations were purchased from
parties outside of Citi; fewer than 2% of the mortgages underlying the
transactions outstanding as of December 31, 2011 were originated by Citi.
In addition, fewer than 10% of the mortgages are serviced by Citi. (The
mortgages serviced by Citi are included in the $396 billion of residential
mortgage loans referenced under “Consumer Mortgage—Representations
and Warranties” above.)
Representation and Warranties
In connection with these securitization transactions, representations and
warranties (representations) relating to the mortgages included in each trust
issuing the securities were made either by Citi, by third-party sellers (Selling
Entities, which were also often the originators of the loans), or both. These
representations were generally made or assigned to the issuing trust and
related to, among other things, the following:
฀฀the absence of fraud on the part of the borrower, the seller or any
appraiser, broker or other party involved in the origination of the
mortgage (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’s compliance with applicable federal, state and local laws;
฀฀whether the mortgage was originated in conformity with the originator’s
underwriting guidelines; and
฀฀detailed data concerning the mortgages that were included on the
mortgage loan schedule.
The specific representations relating to the mortgages in each
securitization varied, however, depending on various factors such as the
Selling Entity, rating agency requirements and whether the mortgages 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 with the identified defects (generally at unpaid
principal balance plus accrued interest) or indemnify the investors for their
losses through make-whole payments. For securitizations in which Citi
made representations, Citi generally also received from the Selling Entities
similar representations, with the exception of certain limited representations
required by, among others, the rating agencies. In cases where Citi made
representations and also received the same representations from the Selling
Entity for a particular loan, if Citi receives a claim based on breach of
those representations in respect of the loan, it may have a contractual right
to pursue a similar (back-to-back) claim against the Selling Entity (see
discussion below). If only the Selling Entity made representations with
respect to a particular loan, then only the Selling Entity should be responsible
for a claim based on breach of the representations.
For the majority of the securitizations where Citi made representations
and received similar representations from Selling Entities, Citi currently
believes that with respect to the securitizations backed by prime and Alt-A
collateral, if it received a repurchase claim for those loans, it would have
back-to-back claims against the Selling Entities that the Selling Entities
would likely be in a position to honor. However, for the significant majority
of the subprime collateral where Citi has back-to-back claims against
Selling Entities, Citi believes that those Selling Entities would be unlikely to
honor back-to-back claims because they are in bankruptcy, liquidation, or
financial distress. In those situations, in the event that claims for breaches
of representations were made against Citi, the Selling Entities’ financial
condition might preclude Citi from obtaining back-to-back recoveries
from them.
To date, Citi has received actual claims for breaches of representations
relating to only a small percentage of the mortgages included in these
securitization transactions, although the pace of claims remains volatile and
has recently increased. Citi has also experienced an increase in the level of
inquiries, assertions and requests for loan files, among other matters, relating
to the above securitization transactions from trustees of securitization trusts
and others. Trustee activities have been prompted in part by lawsuits and
other actions by investors. Given the continued increased focus on mortgage-
related matters, as well as the increasing level of litigation and regulatory
activity relating to mortgage loans and mortgage-backed securities, the
level of inquiries and assertions regarding these securitizations may further
increase. These inquiries and assertions could lead to actual claims for
breaches of representations, or to litigation relating to such breaches or other
matters. For information on litigation, claims and regulatory proceedings
regarding these and other S&B mortgage-related activities, see Note 29 to the
Consolidated Financial Statements.