Citibank 2012 Annual Report Download - page 109

87
Moreover, Citi’s servicing agreements associated with its sales of mortgage
loans to the GSEs generally provide the GSEs with a high level of servicing
oversight, including, among other things, timelines in which foreclosures
or modification activities are to be completed. The agreements allow for the
GSEs to take action against a servicer for violation of the timelines, which
includes imposing compensatory fees. While the GSEs have not historically
exercised their rights to impose compensatory fees, they have begun to do so
on a regular basis. To date, the imposition of compensatory fees, as a result
of the extended foreclosure timelines or otherwise, has not had a material
impact on Citi.
North America Consumer Mortgage Quarterly Credit Trends—
Delinquencies and Net Credit Losses—Home Equity Loans
Citi’s home equity loan portfolio consists of both fixed-rate home equity
loans and loans extended under home equity lines of credit. Fixed-rate
home equity loans are fully amortizing. Home equity lines of credit allow
for amounts to be drawn for a period of time with the payment of interest
only and then, at the end of the draw period, the then-outstanding amount
is converted to an amortizing loan (the interest-only payment feature during
the revolving period is standard for this product across the industry). Prior
to June 2010, Citi’s originations of home equity lines of credit typically had
a 10-year draw period. Beginning in June 2010, Citi’s originations of home
equity lines of credit typically have a five-year draw period as Citi changed
these terms to mitigate risk. After conversion, the home equity loans typically
have a 20-year amortization period.
As of December 31, 2012, Citi’s home equity loan portfolio of $37.2 billion
included approximately $22.0 billion of home equity lines of credit that are
still within their revolving period and have not commenced amortization, or
“reset.” During the period 2009–2012, approximately only 3% of Citi’s home
equity loan portfolio commenced amortization; approximately 75% of Citi’s
home equity loans extended under lines of credit as of December 31, 2012
will contractually begin to amortize during the period 2015–2017. Based
on this limited sample of home equity loans that has begun amortization,
Citi has experienced marginally higher delinquency rates in its amortizing
home equity loan portfolio as compared to its non-amortizing loan portfolio.
However, these resets have occurred during a period of declining interest
rates, which Citi believes has likely reduced the overall “payment shock” to
the borrower. Citi will continue to monitor this reset risk closely, particularly
as it approaches 2015, and Citi will continue to consider the impact in
determining its allowance for loan loss reserves accordingly. In addition,
management is reviewing additional actions to offset potential reset risk,
such as extending offers to non-amortizing home equity loan borrowers to
convert the non-amortizing home equity loan to a fixed-rate loan.
As of December 31, 2012, the percentage of U.S. home equity loans in
a junior lien position where Citi also owned or serviced the first lien was
approximately 30%. However, for all home equity loans (regardless of
whether Citi owns or services the first lien), Citi manages its home equity
loan account strategy through obtaining and reviewing refreshed credit
bureau scores (which reflect the borrower’s performance on all of its debts,
including a first lien, if any), refreshed LTV ratios and other borrower credit-
related information. Historically, the default and delinquency statistics for
junior liens where Citi also owns or services the first lien have been better
than for those where Citi does not own or service the first lien. Citi believes
this is generally attributable to origination channels and better credit
characteristics of the portfolio, including FICO and LTV, for those junior liens
where Citi also owns or services the first lien.