Citigroup Still Selling Mortgages That Violate Quality Standards

15% of the mortgages Citigroup sold to government-owned Freddie Mac from the second half of 2009 and the first part of 2010 were riddled with flaws, according to an internal report obtained by Bloomberg. The error rate should be about 5%. The mistakes included missing insurance docs, missing appraisals and income miscalculations.

Other defects on these mortgages included missing verification that student loan payments were deferred and missing proof of flood insurance. In one, the “maximum loan amount was exceeded,” according to the memo.

What’s odd is that these are completely new mortgages, not ones from the wham-bam era of 2005-2008. Even still the banks can’t, or just don’t feel like they have to, get their act together.

Companies that bought the loans from Citigroup and turn them into securities can ask for their money back if they find out that the loans weren’t up to snuff. Those repurchases would put a dent in Citigroup’s ballyhooed gain of 46%, their first full-year profit in four years.

Citigroup 46% Gain Masks Flawed Mortgages Freddie Mac Calls Not Acceptable [Bloomberg]

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  1. Loias supports harsher punishments against corporations says:

    Glad to see progress was made.

  2. YokoOhNo says:

    I really hope nothing is done that punishes the shareholders permanently. What about the shareholders?!?!?! Won’t anyone think of the shareholders!??!?!?

  3. areaman says:

    More shenanigans from Shitty Bank.

  4. Cheap Sniveler: Sponsored by JustAnswer.comâ„¢ says:

    Cheap Sniveler feigns a “shocked and surprized” look.

  5. SkokieGuy says:

    If only it were established into law that negligence on the part of the mortgage company would automatically result in the voiding of the mortgage and transfer paid-in-full title to the mortgage holder.

    The odds would be far better than the lottery and perhaps it would spur home sales and even speculators hoping to profit from bank ineptitude.

    • Loias supports harsher punishments against corporations says:

      In the short term, it would most likely spur home sales.

      But unintended consequences aside (namely new bank practices that would make home purchase more difficult) it would eventually bring sales back down, say after 10 years max.

      It would certainly cause banks to have better diligence.

    • AustinTXProgrammer says:

      If that were put into place banks would stop lending for 3-6 months, and the red tape to get a mortgage afterward would be tremendous. Closing costs would triple, and an insurance market would be created.

    • evilpete says:

      I agree but instead of voiding the loan such errors should just void some of the banks rights to extra fees or even foreclosure.

      I feel that would be more reasonable.

  6. Blueskylaw says:

    It seems that Citigroup missed their earnings per share by 50%, that and all these other “little” things show that Citigroup still has a long way to go. Unfortunately they still operate in the pre-recession business as usual mindframe and Wall Street is punishing the stock right now: it’s down by almost 7%.

  7. nbaptist says:

    “15% of the mortgages Citigroup sold to government-owned Freddie Mac from the second half of 2009 and the first part of 2010 were riddled with flaws, according to an internal report obtained by Bloomberg.”

    So why did government-owned Freddie Mac purchase them? Must be one of those bureaucratic snafus where they do something then check to see if they can!

    • Loias supports harsher punishments against corporations says:

      I guess you missed the part that says they are allowed to sell them back.

      Points for reading at least part of the article. Negative points for ignoring the parts that don’t fit into your distorted reality.

  8. Polish Engineer says:

    What catches my eye is not that Citi continues to suck, which is a well established fact, but that 5% error is considered an acceptable error rate in financial transactions.

    So even at an acceptable level, one in twenty mortgages have an error? That’s just crazy.

    • FatLynn says:

      I think it depends on the severity of the error and/or the consequences, though. Sure, the ones listed in the article are severe, but are they the majority of the 5%? It could be that .5% have errors like the ones cited, and the other 4.5% are things like “Misspelled maiden name”.

      • Polish Engineer says:

        More than likely this is the case. I believe, however, it is symptomatic of larger mindset of carelessness, arrogance, and incompetence. While single mortgages are drops in the bucket to Citi as whole, they are massive personal investments from the perspective of the borrower that deserve extreme attention to detail. That one missed digit in the SSN can end up impacting the wrong person’s credit score. That misspelled name may cause a check not to clear and trigger the late payment process. The simple fact of the matter is a 5% error rate is just too high.

    • AnthonyC says:

      That’s what I thought, too! 5% is huge. How would things go if 5% of my credit card payments had an error in the account number? Not so acceptable. Yet on a alone equal to 5 years’ salary for me, no big deal?

      Could you imagine if 5% of stock trades, or deeds, or driver’s licenses, or car registrations had errors?

  9. oldwiz65 says:

    Citigroup got away with it before and they know they can get away with it again. After all, they paid enough dirty money to Congress. They will do whatever it takes to earn a profit, even if it’s flat out illegal.

  10. TonyK says:

    Too bad consumers can’t get their money back. LOL

  11. evilpete says:

    I think all flawed loan should *automatically* be repurchased / sold back to the originating bank.

    That’ll make them clean up their act real fast

  12. MaxH42 thinks RecordStoreToughGuy got a raw deal says:

    Don’t worry, Citigroup is taking self-regulation very seriously, no need for actual standards or requirements. Besides, who do you think will bail them out if Freddie Mac asks for refunds on the defective loans?

  13. LadyTL says:

    Of course banks don’t have to “get their act together.” Congress left in place all the laws that let them do exactly what they did before so why in the world should they stop?

  14. Papa Bear says:

    A mortgage is a contract. An illegal contract is void; hence, in theory, the mortgage does not have to be paid. The caveat is that portions of a contract can be ruled illegal and the contract as a whole can still be valid. This is definitely one for the courts to decide.

    If I had one of these mortgages, I would be in court. The first order I would ask for is one establishing a trust account for me to make my mortgage payments so that if I prevail, I get the money back. You just can’t stop paying because that gives the bank the advantage of being the plaintiff.

    Next, as the innocent victim of the bank’s illegal activity, I would seek a ruling which would give me free and clear title to the property. Chances are, if enough of the contract is found to be illegal, I’d prevail.

    If not, I’d seek damages restoring me to my original position. In other words, refunding my down payment and any other money paid in connection with the purchase, covering all costs associated with the move including new furniture and appliances, restoring my previous residence and so on. I’d bet they’d just settle for letting me keep the house.

    At the very least, I would get costs and possibly damages for the emotional distress of having to challenge an illegal contract.

    • MaxH42 thinks RecordStoreToughGuy got a raw deal says:

      I really wanted to cheer you on….but if you RTFA, you’ll see that the defects are in the underwriting, not the consumer mortgage. Therefore, those who bought the securitized mortgages from the originating bank (in this case Freddie Mac) were screwed by the originating bank (Citigroup) because that bank was sloppy about documenting the quality of the product (securitized mortgages) that they were selling; now that quality is unverifiable or verifiably lacking.

  15. hansolo247 says:

    They kept the housing market propped up, which is the administration’s goal.

    If underwriting standards were enforced, house prices would plummet even more. FHA still makes interest-only loans, and loans to dodgy people, too.

    • Papa Bear says:

      Housing prices plummeting is not all that bad a thing considering it was the easy credit that drove the prices skyward. Just like an over-inflated balloon, an over-inflated market will burst.

  16. DragonThermo says:

    Why should banks be like mean ol’ Mr Potter and only issue quality, or at least credible, loans? They can be free-spending George Bailey and issue junk loans and hope nobody notices (again). At worst, they’ll recoup their losses from the taxpayer via TARP. After all, Citigroup is “too big to fail.”