Ex-Citi Exec Warned Bosses of ‘Defective’ Mortgage Pools

Richard Bowen testifying today (Bloomberg News)Beginning in 2006, Citigroup’s chief underwriter overseeing $90 billion in loans warned the institution’s top bosses that at least 60 percent of mortgages purchased and sold were “defective.”
By 2007, as the subprime mortgage bubble would give way to a housing market collapse, Citigroup’s Consumer Lending Group was sitting on pools of subprime mortgages with a defective ratio of 80 percent.
Richard Bowen, the former Citi chief underwriter and senior vice president, testified before the Financial Crisis Inquiry Commission today, outlining unheeded warnings to Rubin and other top Citi executives. Rubin, the former chairman of the executive committee of Citigroup’s board of directors, is to testify before the panel on Thursday.
“Beginning in 2006, I issued many warnings to management concerning these practices, and specifically objected to the purchase of many identified pools. I believed that these practices exposed Citi to substantial risk of loss,” Bowen said in prepared testimony.
Most notable was the lack of strict lending standards. Stricter credit oversight was abandoned in the rush to acquire mortgages originated by third-party underwriters for the purpose of selling in pools within mortgage-backed securities to the government sponsored enterprises, Fannie Mae and Freddie Mac, or Wall Street investors.
This channel – from near blind origination into the hands of eager investors – was the underlying pipeline the fueled the financial meltdown of 2008, and the subsequent credit crunch and foreclosure crisis.
“During 2006 and 2007, I witnessed many changes to the way the credit risk was being evaluated for these pools during the purchase processes,” Bowen testified. “These changes included the Wall Street Chief Risk Officer’s reversing of large numbers of underwriting decisions on mortgage loans from ‘turn down’ to ‘approved.’ And variances from accepted Citi credit policy were made.”
Subprime mortgage pools – many of them valued at more than $300 million – were purchased even though the “minimum credit-policy-required-criteria” was not met, Bowen said.
The origination process lies at the heart of the financial crisis. Citi did not underwrite the subprime mortgages.
“These mortgages were originally made by correspondent mortgage companies and were purchased through Correspondent channels from these third party originators,” Bowen said. “My underwriting function was… to ensure that these mortgages met the credit standards required by Citi credit policy.”
Starting in 2006, Bowen said he issued many warnings to management concerning these practices, and objected to the purchase of many identified pools.
“I believed that these practices exposed Citi to substantial risk of loss,” he testified.
Citigroup received $45 billion in 2008 under the government’s $700 billion Troubled Asset Relief Program, TARP.  In December, it became the last major banking institution to repay its bailout in full.

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