Citigroup suspends mortgage applications

Still trying to get it right, Citigroup suspended mortgage applications from outside mortgage brokers on June 22, citing problems with property appraisals and income-verification documents -- problems that were rampant during the inflation of the real estate bubble.

Citigroup (C) plans to review its processes and reeducate its underwriters before taking applications again on July 6. During that time mortgage brokers will need to work with other lenders.

"There remain key areas that fall short of our quality-control process," according to a letter signed by Brad Brunts, a managing director at the bank's CitiMortgage division. Citigroup has been overhauling its mortgage business since January. The bank lost $28 billion in 2008 with much of the loss tied to mortgage-bond writedowns and costs to cover home loans that went bad.

"You need to have a hard stop," David Lykken, a managing partner of Mortgage Bank Solutions, told Bloomberg. "It is better to pull people off the line, and have a thorough reeducation of what goes into a loan, so they can come back and do this the right way."

During this hard stop, brokers who are trying to place loans will have to go to Citigroup's competitors, but that could be a difficult prospect unless they already have a good working relationship. All banks have tightened their rules and are much more picky about which brokers can place loans. JP Morgan Chase (JPM) was the biggest correspondent lender last year with $98.7 billion of loan originations. Wells Fargo (WFC) was second with $80.5 billion.

Last October Citigroup cut off all but 1,000 of the 9,500 brokers in its network because the bank said these outside mortgage brokers made loans of poor quality or in insufficient volume to be profitable. The company also stopped making second-lien mortgages through third parties. Anyone who wants an equity line or other type of second-lien product form Citigroup must apply directly to the bank. As of December 31, the bank had $73 billion of mortgages that were generated by its broker network or correspondent division.

This hard stop could be a way to review the work of brokers and possibly drop some others whose loan submittals do not meet the quality standards set by Citigroup. As the banks reduce the number of mortgage brokers out there, they continue to reduce the competition for mortgage options.

Lita Epstein has written more than 25 books including Trading for Dummies.
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