Citi Shuns Portfolio Lending, Targets Conforming Mortgage Production

Facing increasing problems with credit quality, Citi said Thursday that it expects to shrink its residential mortgage portfolio substantially in 2008 and 2009 as part of a strategy to refocus and realign its mortgage banking business. The New York-based bank will also bring its CitiMortgage, Citi Home Equity and Citi Residential Lending business units under the CitiMortgage umbrella as part of a consolidation effort, it said.

Citi will look to reduce its substantial portfolio of residential mortgages by approximately $45 billion during 2008, roughly a 20 percent decrease from the $232 billion in consumer real estate assets held by the firm at the end of the fourth quarter.

Spokesperson Mark Rodgers said the figure primarily represented an estimate of portfolio run-off at Citi, and that the firm wasn’t explicitly planning to sell a portion of its loan portfolio.

“If an opportunity to sell came up, however, I’m sure we’d consider it,” he said.

Citi also said it expects to cut the amount of new loans it holds in its portfolio by more than 50 percent in the next year, as it looks to adopt an “originate and sell” focus going forward. To get there, CitiMortgage expects to bump conforming loan production up dramatically by the third quarter of the year, it said, selling 90 percent of overall production to Fannie Mae or Freddie Mac. Just 65 percent of loan production in 2007 was GSE-eligible.

The move away from portfolio-based lending comes during a time when most large U.S. banks are seeing their market share increase via direct origination channels, and many industry observers have suggested that the traditional “originate and hold” approach to mortgage lending was making a comeback. It also signals further changes to the company’s mortgage programs in the months ahead.

The company said it no longer offers mortgage loans for investment properties on three- and four-family homes and has curtailed bulk loan purchases. In addition, the company has eliminated 2/28 and 3/27 ARMs as well as home-equity loans behind lower-FICO score first mortgages, it said.

Sources that spoke with HW said Citi’s plan likely means significantly reduced loan production. “If they want to move to 90 percent conforming, there’s alot of volume there that’s going to disappear,” said one source, who asked not to be named.

“And it’s not as if they’ll have a choice, since they want to sell most of what they originate. Conforming is really the only game in town right now for that model,” she said.

Citi first announced that it would be consolidating mortgage activities in January, as credit costs in its U.S. consumer lending business — which included mortgage banking prior to today’s reorganization — reached $4.1 billion during the fourth quarter.

Citi did not comment on whether further consolidation of its mortgage operations would result in additional cuts to staffing.

For more information, visit http://www.citi.com.