Tuesday, November 2, 2010

Citigroup's Toxic Mortgage Pipeline Could Mean Mammoth Put-Back Risks

From a CNBC article today:
http://finance.yahoo.com/news/Citigroups-Toxic-Mortgage-cnbc-2855256330.html?x=0&sec=topStories&pos=2&asset=&ccode=
   Investors have largely given Citigroup a pass when it comes to put-backs-an action where investors force banks to repurchase mortgages and the securities related to them. While Citi's rivals saw their share prices fall last month on put-back concerns, Citi's shares rose.

   Citi may be "the best in class" when it comes to mortgage put-back exposure. But it is hardly immune to put-backs. Keep in mind that put-back exposure does not arise from mortgages Citi itself owns. Instead, the put-back issue arises from mortgages Citi sold to others, either directly or as part of a pool of mortgages underlying a mortgage-backed security.

   Citi executives say there are $504 billion of these mortgages that it services but does not hold. (We call these the Serviced But Not Held Portfolio, or SBNH Portfolio for short.) These mortgages do not appear on Citi's balance-sheet.

   None of this matters. None of it. Citi will be allowed to survive and even thrive in the next upswing in the economy. All of the stories that you'll read about in the next few years about the mortgage market is noise. No one will care about any of the "toxic mortages," "robo-signers," "foreclosure mess," in a few years. All of the follies of the banks will be papered up, paid for by tax payers, and allowed to simmer down. This is how it's going to be, how it has been, and how it always will be. Welcome to the Republic.

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