In a move that suggests improving credit standards at Citicorp, the Federal National Mortgage Association has agreed to buy $ 1 billion of new mortgages from the company with no strings attached.
Though most other banking companies have long sold home loans to Fannie Mae on this type of nonrecourse basis, the new agreement is a first for the nation's biggest bank.
The quality of Citicorp's mortgages has been in the spotlight in recent months because of abnormally high delinquencies. A scathing examiner's report leaked a few months ago alleged sloppy management and lax credit practices in the company's mortgage unit.
The Fannie Mae deal by no means puts Citicorp's mortgage woes behind it. But it is, nonetheless, being taken as a good sign.
"The fact that Fannie Mae is prepared to accept Citicorp's mortgages as investment grade is a meaningful endorsement," said Jonathan Gray, an analyst at Sanford C. Bernstein & Co.
The agreement was disclosed during an interview Friday with Kim Rosenberg, head of secondary marketing in Citicorp's mortgage unit.
Under terms of the accord, Fannie Mae cannot return to the bank any loan that might later go bad. That means that Citicorp will not have to set aside capital against the loans.
A Citicorp spokeswoman said the pact would save Citicorp about $25 million in capital costs, or one basis point of Tier 1 capital.
A High-Risk Strategy
The deal also illustrates how the nation's largest banking company is emphasizing capital concerns over business volume. In past years, Citicorp was willing to risk higher defaults in exchange for a rapid increase in fees and interest income.
Until now, neither Fannie Mae nor its chief competitor, the Federal Home Loan Mortgage Corp., would buy new mortgages from Citicorp without retaining the right to put defaulted loans back to the company. That was because the bank originated many of its loans with little documentation of borrowers' income.
Citicorp deliberately pursued the "low-doc" formula in order to build volume, despite the increased risk of defaults.
In the past year, Citicorp has phased out that strategy and taken other steps to meet Fannie Mae's standard for nonrecourse sales. For example, it recently decided to buy mortgage insurance for loans with low down payments.
Previous Sales with Recourse
Citicorp originates about $8 billion of mortgages annually, ranking it 12th among all mortgage originators, down from No. 6 last year. Until now, Citicorp has sold almost all of its mortgages into the secondary market, albeit on a recourse basis.
Despite the deal with Fannie Mae, Citicorp has yet to resume mortgage sales to Fannie Mac -- with or without recourse. In March, the agency refused to renew a contract under which it was buying loans from Citicorp.
Freddie Mac felt the bank "had not effectively addressed control and management issues," Citicorp wrote in a recent filing with the Securities and Exchange Commission.
Citicorp said it is now addressing the issues and is actively negotiating a contract with Freddie Mac. Mr. Rosenberg declined to elaborate on those talks.