Citigroup (NYSE:C) wants complete control over the quality of new mortgage loans it adds to its portfolio – something it aims to achieve by ensuring that all mortgages are henceforth originated directly by the bank, and not through brokers.  The global banking giant has clearly taken this decision to ease growing investor concerns about the quality of mortgage portfolios held by the countries biggest home loan lenders, following in the footsteps of competitors Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) (see Bank of America Scrambling to Ease Investor Concerns). Most of the around 300 employees engaged in the mortgage brokerage business will be absorbed into other Citigroup businesses.
We maintain a $35 price estimate for Citigroup’s stock and believe that the near 12% premium can largely be attributed to the widespread pessimism among investors toward the financial sector in the wake of the macroeconomic uncertainty and the European debt situation.
Citigroup reportedly originated just under $68 billion in mortgages last year, and brokers contributed to 8.6% of this figure.  This works out to below $6 billion in mortgages originated through brokers. So in essence, Citigroup is letting go of a business that accounts for around $6 billion in mortgage loans to its portfolio each year in return for a tangible improvement in its portfolio quality – besides the intangible benefit of garnering much needed investor confidence in its business. Not a very bad deal, considering its mammoth near-$500 billion global loan portfolio base, and keeping in mind the fact that the mortgage industry hasn’t quite picked up yet after its collapse in 2008. Citigroup can always focus on improving its share of the mortgage lending market organically at a later time if it so sees fit.Notes:
- Citigroup Says Bank Will Exit Mortgage Brokerage Business, Bloomberg, Feb 1 2012 [↩] [↩]