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Citigroup’s Defective-Loan Rate Improves to F+: Jonathan Weil

Sometimes it seems there’s only one way for the public to find out what’s really going on inside our most important institutions. And that’s for some juicy document from deep inside their bowels to magically find its way to an enterprising journalist, as if delivered by an occult hand.

The best leaks enlighten and inform us in ways we could not have imagined before. That’s what readers of a Bloomberg News story this week about Freddie Mac and Citigroup Inc. were treated to. Whoever made this leak possible, the public is better off for it.

The gist of the article by Bob Ivry and Bradley Keoun: Citigroup, the too-big-to-fail bank that got a $45 billion government rescue, was still selling defective mortgages to Freddie Mac at an alarmingly high rate as recently as last year. And taxpayers, who now own Freddie, are on the hook as a result. The details are in an Oct. 25, 2010, internal Freddie Mac memo summarizing the findings of a yearlong quality-control review that ended last September.

Fifteen percent of the performing loans that Citigroup sold to Freddie were “not acceptable quality,” based on a sample of 375 loans from 2009 and 2010, the memo said. That means they didn’t meet Freddie’s standards, due to missing documents, ineligible borrowers or other reasons. A defect rate of 5 percent is considered acceptable within the industry.

The review also examined 682 other loans Citigroup sold to Freddie in which the borrowers had defaulted. The memo said 61 percent of those loans violated Freddie’s quality standards.

God Bless Leakers

These aren’t the kinds of statistics you’ll find in official reports from Freddie Mac or its conservator, the Federal Housing Finance Agency, or from Citigroup or its regulators. Ideally, the government should make such information public without having to be asked or sued for it. That’s not the government we have, though, which is why we still need leaks.

The Freddie employees who wrote the memo said the purpose of their review was to “provide feedback on the quality control results” that will “highlight areas of focus for the lender to better align their results with FM’s expectations.”

Talk about meek. They didn’t say the purpose was to identify how much money Citigroup owed Freddie, or how to get it back. No wonder Freddie has needed $63 billion in federal aid since it was placed in conservatorship in 2008. It keeps treating the taxpayers’ cash like it’s nobody’s money.

‘Fantastic Job’

Sanjiv Das, the head of the Citigroup unit that originates mortgages and buys them from smaller lenders, declined to comment about the Freddie findings for Bloomberg’s story. “My own information based on our defect rates tells me we are doing a fantastic job,” he said. Amazingly, he may be right.

Last April, a former top underwriter in Citigroup’s consumer lending division, Richard Bowen, testified before the Financial Crisis Inquiry Commission about the mortgages that Citigroup had been buying from third parties and selling to Freddie Mac, Fannie Mae and other investors before its 2008 taxpayer rescue. Bowen said he discovered in mid-2006 that more than 60 percent of the mortgages purchased and resold by Citigroup were defective. By 2007, he said, that rate had increased to more than 80 percent.

Looked at this way, a 15 percent defect rate might be a full-blown miracle. Never mind that it would be like a failing student improving his grade point average to an F+.

So who benefits from this leak? Some of the bosses at the two companies and their government minders must be embarrassed, which can only be good for the rest of us. To the extent that Freddie and Fannie have become a grabfest for the banking industry, that’s something Congress should know when it eventually gets around to rewriting the laws that govern them. Most importantly, though, the public needs to be told when it’s getting ripped off, especially when the government knows it and has no intention of telling us.

More leaks like this one, please.

(Jonathan Weil is a Bloomberg News columnist. The opinions expressed are his own.)

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