Citigroup Inc. is nearly finished melding together its once-separate prime and subprime first mortgage businesses.
The upshot is that the New York banking giant now has "an opportunity to significantly expand in the nonprime space," said Bill Beckmann, the president of CitiMortgage Inc., the St. Louis unit in which the two have been combined.
As is typical in the mortgage business these days, Mr. Beckmann put Citi's aims in terms of competitive rankings. For nonprime mortgages, "we are not one of the top 10 providers, and obviously in the prime space we are," he said. "There's no reason we shouldn't be."
His remarks are another sign that, despite worries about consumer credit and home prices, ramping up in higher-risk mortgage niches is increasingly a strategy for several major banking companies, such as Wells Fargo & Co. and Washington Mutual Inc.
Indeed, Bank of America Corp., which quit subprime in 2001, recently said it was considering reentering it, and Wachovia Corp., which held back from option adjustable-rate mortgages as their popularity boomed, has a deal to buy the loans' granddaddy, Golden West Financial Corp.
For Citi, the potential for higher nonprime volumes as a result of combining the prime-focused CitiMortgage and subprime-focused CitiFinancial Mortgage Co. Inc. stems in large part from the ability to sell legacy nonprime products through prime sales channels, Mr. Beckmann said. It has also been adding new nonprime products as part of the process, he said. By nonprime, he meant loans that do not fit the guidelines of Fannie Mae and Freddie Mac, but he said Citi was not planning to reach aggressively for more volume in "deep" subprime.
CitiFinancial Mortgage, which does nearly all of its lending through intermediaries, is not to be confused with CitiFinancial, the branch-based consumer lending unit that reports to Ray Quinlan. That unit was not affected by the integration. (It is being revamped itself, however; Citi recently converted 17 of these branches into "gateway" branches where customers can also open Citibank checking or savings accounts.)
The integration of the first-mortgage businesses got rolling last September with an organizational revamp that put CitiMortgage, CitiFinancial Mortgage, and Citi Home Equity under a consumer lending group headed by Carl Levinson. (All told, Citi originated about $130 billion of home loans in the United States last year, making it the No. 6 producer.) It decided in November to combine CitiMortgage and CitiFinancial Mortgage.
Mr. Beckmann spoke about the integration Thursday on a conference call for the news media and in a follow-up interview with American Banker. During both he also cited an opportunity for greater prime volumes as a result of the consolidation, in particular because it lets Citi more easily offer prime loans to current nonprime borrowers looking to refinance.
But in the interview he called increased nonprime production the bigger opportunity. He also said that "given the margins in that space compared to the margins in the prime space right now," it wouldn't take "enormous volumes to have a material impact to our business."
The other main impetus for the combination was Citi's desire to streamline back-office and "middle-office" (such as credit, finance, human-resource, and legal) mortgage expenses and gain efficiencies as competition pressures all lenders' margins, Mr. Beckmann said.
Wamu is pursuing a similar strategy, this year combining the management of its prime home-loan and Long Beach Mortgage nonprime units. (The Seattle thrift company, however, apparently has not done as much integration on the sales side so far. National City Corp., which also owns separate prime and nonprime mortgage units, recently said it is considering selling the nonprime one, First Franklin Financial.)
Mr. Beckmann said there were several important developments in the past month.
First, in late June the Federal Reserve approved a modification of commitments Citi made in 2000, when it bought CitiFinancial's predecessor, Associates First Capital, and in 2004, when it settled the Fed's probe of allegedly predatory subprime mortgage practices.
The commitments limited the points CitiFinancial Mortgage could charge, the length of prepayment penalty periods, and sales of credit-life insurance. To allow for the unit to disappear, the Fed consented to letting the promises instead apply to any loans considered "high-cost" under the definition used in the update to Home Mortgage Disclosure Act data collection last year, Mr. Beckmann said.
That (and discussions with the Office of Thrift Supervision) cleared the way for Citi to dissolve the legal entity CitiFinancial Mortgage and move that unit's employees and operations into CitiMortgage on July 1.
CitiFinancial Mortgage's operations in Dallas, where the unit was based, nevertheless will remain a "strategic" part of Citi's mortgage business, which is maintaining its head count there for the "foreseeable future," Mr. Beckmann said.
This month, brokers working with Citi got access to all of its products from the same online platform.
Last quarter, each side of Citi's about 300-person wholesale sales force had begun training in the area they did not know already and then pushing those products. Importantly, the technology upgrade - a large investment Citi made despite the tough market - eliminated a need to use "different platforms and different documents" in each category, Mr. Beckmann said.
CitiMortgage's correspondent lenders will get access to a similar platform in August, and its retail business will get one in September. The correspondent sales force has been cross-trained; the retail salespeople will begin training soon. All of Citi's home equity products are expected to be on the platforms later in the year.
Another important sales technology change is expected early next year, when CitiMortgage expects to introduce a tool that will find a "best fit" loan for borrowers, Mr. Beckmann said. That is something Wells, for instance, launched last year. Citi's tool will also include a "suitability" test, Mr. Beckmann said.
He said his lender also has "a broader product set." For instance, it is offering the old CitiMortgage's interest-only products to brokers and correspondents who had worked with CitiFinancial Mortgage. It has also added new interest-only products for less-creditworthy customers, such as the two-year hybrid ARMs popular with subprime borrowers.
That revelation raised another question: Only last year, top Citi executives were bragging about its refraining from offering alternative products, such as interest-only and no-documentation loans, to subprime borrowers (and using that decision as an excuse for lagging behind rivals).
Mr. Beckmann called the rollout of interest-only nonprime ARMs "entirely consistent" with the past statements. He said Citi would not offer interest-only loans "deep into the nonprime space" - only down to 620 FICO scores. And, he stressed, "we're not going to make a loan on an affordability basis. We're going to make a loan because we believe it's right for a customer because we think they can pay it back."
Citi has talked with regulators to ensure they are comfortable with what it is doing, he said, particularly in light of pending interagency guidance on exotic products. And it does not plan to start making option ARMs, which allow for negative amortization.
Mr. Beckmann said Citi is also considering the risks in nonprime in other ways.
On the sales side of its third-party business - the bulk of CitiMortgage's volumes and all of CitiFinancial Mortgage's except for retention efforts - it will use some former CitiFinancial Mortgage account executives as nonprime specialists to support other reps (in wholesale) or to focus solely on the business (in correspondent). This will help ensure the different risks get taken into account, he said. And, on the operations side, nonprime loans still will be going to separate staff for underwriting and processing.
Despite the extensive pain felt by nonprime-focused home lenders amid surging competition in recent years, Mr. Beckmann said Citi believes nonprime home lending still has much higher margins than prime lending, even on a "credit-adjusted basis." More data on the credit performance of nonprime loans is another source of comfort, he said.
"Given the tightening of the prime market, it's a wonderful time … for us to be bringing to bear some of our strengths in the space," he added later.
