Citigroup and the Modification of Mortgages?

This past September, Citigroup acquired the servicing rights to a $45 billion portfolio of subprime mortgages. The acquisition of this portfolio boosted the company's total of subprime mortgage holdings to an estimated $88 billion, second in the nation behind lending-giant Countrywide Financial Corp. The portfolio included 280,000 loans, many of which are already in default.

How Mortgages Are Bought and Sold

Typically, most mortgages will originate by a single financial institution. Mortgages will then be lumped together and sold to investors in the securities market. If borrowers are unable to pay back their mortgages, the company that services the loan will have to pay the investors directly. This puts pressure on servicing companies (like Citigroup) to collect unpaid payments from borrowers.

When delinquent fees and other non-payment penalties don't yield the necessary results, servicing companies have to explore other options, like rewriting the terms of the mortgage or foreclosing. Servicing companies may find it more economically viable to accept lower monthly payments rather than foreclose on a house, try to sell it and recoup losses.

The Modification of Mortgages

Many servicing companies have decided to convert mortgages for subprime borrowers. Companies like Washington Mutual, Countrywide, J.P. Morgan Chase and HSBC have enacted plans to convert adjustable-rate mortgages with introductory teaser rates to 30-year fixed mortgages. Citigroup decided to go another route. The company began to modify some existing adjustable-rate mortgages from three years to seven years in order to alleviate some of the pressure felt by thousands of borrowers categorized as subprime. The company recognizes that this is a short-term solution. Citigroup has embarked on a 25-city tour aimed at helping subprime borrowers avoid foreclosures.