Sept. 7 (Bloomberg) -- Citigroup Inc., the largest U.S. bank, curtailed lending to mortgage companies, according to two people with knowledge of the decision.

The bank's First Collateral Services unit won't accept new clients for ``warehouse'' credit lines, which provide cash to mortgage banks so they can fund home purchases and refinancings, the people said. They declined to be identified because they don't want to hurt relationships with New York-based Citigroup. First Collateral, based in Concord, California, still lends to existing customers, the people said.

Citigroup's decision may make it harder for some home lenders to survive. More than 100 have sought buyers or halted operations since the start of 2006 as U.S. foreclosures climbed to a record in the second quarter. Loss of warehouse credit may have led to all of this year's 15 bankruptcy filings, said Ronald Greenspan, senior managing director for FTI Consulting Inc., a Baltimore-based firm that advises creditors.

``Our decisions are based on our continued evaluation of the current and evolving market environment,'' Citigroup said in an e-mailed statement that didn't confirm the decision. Brad Knapp, listed as president of First Collateral on the unit's Web site, didn't return a call seeking comment.

First Collateral ranked fifth among warehouse lenders with $4 billion of commitments as of March 31, according to estimates by National Mortgage News. The biggest was Seattle-based Washington Mutual Inc., the newsletter said.

Credit Lines

First Collateral provides credit lines from $2 million to $250 million, according to its Web site. In a typical warehouse arrangement, a bank or securities firm provides a smaller lender with cash needed to make home loans, and then holds the mortgage until it's sold to investors or packaged into a security.

The unit's Web site says First Collateral finances mortgages ranging from conventional loans to subprime. The latter are offered to borrowers with the weakest credit records.

Warehouse lenders including Citigroup, Merrill Lynch & Co., JPMorgan Chase & Co. and Bear Stearns Cos. have been trying to recover losses in bankruptcy court after mortgage banking clients failed and sales of their collateral didn't cover debts.

Citigroup may write down $13 billion of subprime mortgages linked to warehouse loans held at its investment bank by as much as $1 billion this quarter, analysts at Sanford C. Bernstein & Co. wrote in a report last month.

Warehouses Closed

Regions Financial Corp., the Birmingham, Alabama-based bank, and NovaStar Financial Inc., the Kansas City, Missouri-based subprime lender, shut warehouse units this year. WarehouseOne, the Trenton, New Jersey-based firm that finances smaller mortgage companies, started winding down its business Aug. 31 until conditions improve.

Other warehouse lenders are refusing new clients, in part because it's ``too difficult to determine the financial condition'' of the companies, WarehouseOne President Gary Hoyer said in an interview.

``I would think if you were out looking for a new warehouse line, you couldn't get it,'' said Brian Simon, a senior vice president at Freedom Mortgage Corp., a Mount Laurel, New Jersey- based mortgage bank.

Some warehouse lenders have started telling clients ``who they can or can't sell loans to,'' Simon said. Hoyer said he became wary after loan buyers didn't follow through on purchases -- sometimes because they've gone out of business -- sticking warehouse lenders with mortgages whose value as collateral may be less than expected.

Accord Expands

New Century Financial Corp., the second-largest U.S. subprime lender last year, went bankrupt in April after warehouse lenders cut off credit. The Irvine, California-based company also provided warehouse lines to smaller lenders. Melville, New York- based American Home Mortgage Investment Corp., the 10th-largest mortgage lender in the first half of 2007, sought court protection from creditors after a similar cash shortage.

Citigroup agreed last week to buy the wholesale mortgage origination and servicing businesses of ACC Capital Holdings, operator of Ameriquest Mortgage Co. ACC once ranked as the nation's biggest subprime home lender. Citigroup agreed to inject cash into ACC last February as part of a deal that made Citigroup ACC's primary warehouse lender.

Centex Corp., a Dallas-based homebuilder and lender, said in a regulatory filing today it replaced a warehouse credit line with a larger one arranged by JPMorgan Chase & Co. that may provide as much as $1 billion. Centex increased the credit line because the global credit crunch made it hard to rely on selling short-term notes to finance mortgages, the filing said.

Citigroup fell 18 cents to $45.48 at 4:17 p.m. in New York Stock Exchange composite trading, leaving the shares down 18 percent this year.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: September 7, 2007 17:14 EDT