Citi: The mortgage underwriter’s tale

By Felix Salmon
April 7, 2010

The Financial Crisis Inquiry Commission is holding more hearings this week, and the prepared testimony of Richard Bowen, a former senior mortgage underwriter at Citigroup, is well worth reading.

He explains how between 2005 and 2007 Citi’s underwriting standards simply fell apart, as the securitization professionals in the investment bank would override or ignore Citi’s own underwriters:

In the third quarter of 2006 the Wall Street Chief Risk Officer started changing many of the underwriting decisions from “turn down” to “approve.” This was done either personally or by direction to the underwriters. This artificially increased the approval rate on the sample. This higher approval rate was then used as justification to purchase these pools.

In the sample on one $300+ million Merrill Lynch subprime pool the underwriters turned down 716 mortgages as not meeting Citi policy guidelines. The Wall Street Chief Risk Officer personally changed 260 of these “turn downs” to “approved.” The pool was purchased…

Still another $320 million Merrill Lynch pool was purchased with an approval rate of 72%. Citi policy required a minimum approval rate of 90%.

Bowen also explains the sneaky way in which a pool of mortgages which was 60% bad was reported to the Third Party Origination Committee (“TPO”), which had overall responsibility for managing the selling mortgage company relationships, as being 95% good:

I spent time with the QA management and underwriters to better understand the QA processes. I learned that there were actually two categories of “agree” decision, with only the total of the two agree decisions being reported to TPO committee.

There was the “agree” decision, meaning the Citi underwriter agrees with the selling mortgage company underwriter that the file meets Citi policy criteria.

And there was an “agree contingent” decision, meaning that the Citi underwriter agrees with the original underwriting decision. But the decision is contingent upon receiving documents that are missing from the file, and those documents confirm the conditions underwritten.

An an example, the selling mortgage company underwriter may have approved a mortgage file showing a 45% debt to income ratio, which was within Citi policy criteria for the product. However, the required proof of income documentation confirming the borrower income used in the underwriting decision might be missing from the file. In this instance the Citi underwriter would assign an “agree contingent” decision to the file. The agree decision would be contingent upon receiving the income documentation proving the income utilized in the originating underwriter decision.

The total of the “agree” and “agree contingent” decisions would be reflected as the overall “agree” rate when reported to TPO Committee. This overall agree rate was the only agree rate reported to TPO through June 2006. And it was believed by the underwriters I interviewed that over half of the files had “agree contingent” decisions, meaning over half of the files were missing policy-required documents.

The QA process was very manual and lacked any automated reporting. The manager relied upon manual tally sheets, manually added, to produce the aggregate reporting given to TPO committee.

After significant effort, it was determined that the 5% disagree, 95% agree originally reported to June TPO was incorrect. It should have been 5% disagree, 55% agree contingent, and 40% agree. In other words, 5% were not underwritten to Citi policy and another 55% were missing policy- required documents.

Bowen sent an email to Bob Rubin and other senior Citi executives in November 2007. It had the subject line “URGENT — READ IMMEDIATELY — FINANCIAL ISSUES”, and it explained that Citi had yet to recognize enormous mortgage-related losses. I’m looking forward to the commissioners asking Bowen for some tips on what questions they should put to Rubin tomorrow. That testimony is going to be very interesting indeed.


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Wow, this is going to keep the lawyers busy for years.

Posted by Beer_numbers | Report as abusive

1/3 of all foreclosures are strategic

Posted by Storyburn_com | Report as abusive

I was going to write to you, but couldn’t find an email. So this is off topic a bit…

Did you know that in California only original mortgages are non-recourse loans? If you re-finance, you are on the hook for the whole balance. I wonder if this accounts for less people walking away than you would expect with prices off 30-40%?

My buddy found out because his broker got him a 2nd mortgage with a 6-month teaser rate that ballooned to something ridiculous, with the idea he could re-fi when the rate ended. The loan was designed to be re-fied from the start.

I am sure when the actual re-fi went through, there was proper disclosure that the new loan was full-recourse. I am also certain there was no discussion of this when the original loan was written and that is when the decision to re-fi was made.

Posted by Mr.Do | Report as abusive

Whatever happened to this paper: mentary/2009/0509.cfm

“Ten Myths about Subprime Mortgages Yuliya Demyanyk

“Myth 4: Declines in mortgage underwriting standards
triggered the subprime crisis

An analysis of subprime mortgages shows that within the first year of origination, approximately 10 percent of the mortgages originated between 2001 and 2005 were delinquent or in default, and approximately 20 percent of the mortgages originated in 2006 and 2007 were delinquent or in default. This rapid jump in default rates was among the first signs of the beginning crisis.

If deteriorating underwriting standards explain this phenomenon, we would be able to observe a substantial loosening of the underwriting criteria between 2001–2005 and 2006–2007, periods between which the default rates doubled. The data, however, show no such change in standards.

Actually, the criteria that are associated with larger default rates, such as debt-to-income or loan-to-value ratios, were, on average, worsening a bit every year from 2001 to 2007, but the changes between the 2001–2005 and 2006–2007 periods were not sufficiently high to explain the near 100 percent increase in default rates for loans originated in these years.”

Here was my comment on the “Economist’s View” blog:

Don the libertarian Democrat said…

“If deteriorating underwriting standards explain this phenomenon, we would be able to observe a substantial loosening of the underwriting criteria between 2001–2005 and 2006–2007, periods between which the default rates doubled. The data, however, show no such change in standards. ”

How can they conclude this? Take Countrywide: 0601087&sid=aEsd2SRYtj7A

Lower Standards

“The company lowered its underwriting standards, pushed loans that required no documentation of income and gave incentives to loan officers and brokers to steer borrowers into riskier loans, California and Illinois claimed in the suits. ”

We don’t even have all the evidence in yet.
Reply Jul 22, 2009 at 06:55 PM

Posted by DonthelibertDem | Report as abusive

To say that Citi’s underwriting standards “simply fell apart” implies that they were succumbing passively to gravitational pull, whereas the testimony cited states “This was done either personally or by direction to the underwriters.”

That there was a profit motive behind issuing toxic mortgages is therefore implicit. That those who issued them en masse with psychopathic disregard for the magnitude of ensuing impact are directly responsible for the crisis, goes without saying.

Posted by HBC | Report as abusive

Where did this story go? Our politicians were so clever to delay any actions or reports until after the elections! The reason so many people are frustrated is that when a Richard Bowen has the courage to speak out, the media and politicians follow their own agendas to the detriment of all. It is interesting to me that has no story about Richard M. Bowen’s account on his warnings to Citibank management. If President Obama, Speaker Nancy Pelosi, and Senator Harry Reid want to know where their credibility went, they need to look no further. As James Madison said, “If men were angels, no government would be necessary . . .”

Posted by d.erasmus | Report as abusive