Citigroup warned this morning that it could see earnings drop as much as 60 percent during the third quarter on mortgage and loan losses. The nation’s largest financial institution cited “dislocations in the mortgage-backed securities and credit markets, and deterioration in the consumer credit environment” as the reason for the expected losses. The company said it will write down roughly $1.4 billion on funded and unfunded loan commitments and record losses of about $1.3 billion on the value of subprime mortgage-backed securities. Citigroup also said it will record a loss of $600 million in fixed-income credit trading due to market volatility. Interestingly, the losses aren’t just expected to hit in the company’s mortgage-related operations — Citigroup warned it is also seeing deterioration in consumer credit as well, a development that will increase credit costs approximately $2.6 billion pre-tax versus the prior-year quarter. Approximately one-fourth of the increase in credit costs is expected to be driven by higher net credit losses, while three-fourths of that amount is expected to cover an increase in loan loss reserves. From the press statement:

“Our expected third quarter results are a clear disappointment. The decline in income was driven primarily by weak performance in fixed income credit market activities, write-downs in leveraged loan commitments, and increases in consumer credit costs,” said Charles Prince, Chairman and CEO of Citi. “Our fixed income trading business has a long history of earnings power and success, as shown in this year’s record first half results. In September, this business performed at more normalized levels and we see this quarter’s overall poor trading performance as an aberration. While we cannot predict market conditions or other unforeseeable events that may affect our businesses, we expect to return to a normal earnings environment in the fourth quarter,” said Prince.

Click here for the transcript of the company’s conference call this morning.