The ongoing subprime post-mortem

At the beginning of the subprime mess, there was a tendency to blame overactive American mortgage brokers for flogging dangerous loans to reckless homeowners. That, of course, was the least of it, as this link at CreditWritedowns makes blindingly clear. It’s a long post more suited to weekend reading, so here’s an excerpt from testimony given by Richard Bowen, former senior vice-president and business chief underwriter with CitiMortgage Inc.

“The delegated flow channel purchased approximately $50 billion of prime mortgages annually. These mortgages were not underwritten by us before they were purchased. My Quality Assurance area was responsible for underwriting a small sample of the files post-purchase to ensure credit quality was maintained.”These mortgages were sold to Fannie Mae, Freddie Mac and other investors.

Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

“In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.

“I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.

“We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.”

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