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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