CitiMortgage Wants to Get Big in Correspondent Lending Again

Citigroup (NYSE:C) plans to significantly expand its share of the mortgage market by purchasing mortgages from correspondent lenders, a channel it cut back two years ago.

Jane Fraser, the chief executive of CitiMortgage, said Tuesday that the lender will take a more aggressive approach to building its mortgage business after ceding market share during the downturn.

"Lean markets do give you some quiet time to fix what is broken and to better compete," Fraser said at the Mortgage Bankers Association's annual secondary market conference in New York. "We are focusing on getting good again, getting streamlined and looking for clients where we can build a strong relationship."

The about-face could spark renewed confidence in the mortgage market, which has suffered from anemic loan volume.

Last year, Citi's Chief Financial Officer John Gerspach told analysts that the bank was not looking to significantly increase its share in mortgages other than making loans to its existing retail bank customers.

Citi's move may bring much-needed liquidity to a segment of the mortgage market that most of the big banks, with the exception of Wells Fargo (WFC), fled in the aftermath of the crisis.

"The correspondent market is good for us. Not only are we open for business, we want to grow in this market," Fraser said. "It's a strategy agreed to with our senior management and board and we're comfortable with it."

Fraser acknowledged that Citi had previously whittled down the number of correspondent lenders it buys loans from. Purchasing loans from smaller mortgage banks and private lenders presents plenty of challenges, she said. Large bank aggregators have to take time to review the loans they purchase to ensure they are of high quality.

"Given that we will be holding new loans for a long time, it means we will be extremely careful about the manufacturing of loans," she said. "We have no alternative."

The massive drop in refinancing and home-purchase volumes in the last two quarters has caused lenders like Citi to refocus. Demographic shifts, regulation and litigation, and tighter credit standards are constraining the market.

"The start of 2014 has been very ugly," Fraser said. "We are asking if there is a new normal that leads to a smaller housing sector. It's clearly much more complex than just the cycle."

CitiMortgage ranked eighth among correspondent lenders last year, with $10.5 billion in loans funded, down 14% from 2012, according to mortgagestats.com. In 2008, it was the No. 4 lender in the channel.

C.D. Davies, an industry veteran, joined CitiMortgage in March as head of originations in North America and head of mortgage operations for Citicorp (the umbrella name for the parts of the parent company Citigroup wants to keep). He reports to Fraser.