Citigroup Inc.

Repurchase ReserveCiti has recorded a reserve for its exposure to losses from the obligation torepurchase previously sold loans (referred to as the repurchase reserve)that is included in Other liabilities in the Consolidated Balance Sheet. Inestimating the repurchase reserve, Citi considers reimbursements estimatedto be received from third-party correspondent lenders and indemnificationagreements relating to previous acquisitions of mortgage servicing rights. Citiaggressively pursues collection from any correspondent lender that it believeshas the financial ability to pay. The estimated reimbursements are based onCiti’s analysis of its most recent collection trends and the financial solvencyof the correspondents.In the case of a repurchase of a credit-impaired SOP 03-3 loan, thedifference between the loan’s fair value and unpaid principal balance at thetime of the repurchase is recorded as a utilization of the repurchase reserve.Make-whole payments to the investor are also treated as utilizations andcharged directly against the reserve. The repurchase reserve is estimatedwhen Citi sells loans (recorded as an adjustment to the gain on sale, which isincluded in Other revenue in the Consolidated Statement of Income) and isupdated quarterly. Any change in estimate is recorded in Other revenue.The repurchase reserve is calculated by individual sales vintage (i.e.,the year the loans were sold) and is based on various assumptions. Whilesubstantially all of Citi’s current loan sales are with GSEs, with which Citihas considerable historical experience, these assumptions contain a levelof uncertainty and risk that, if different from actual results, could have amaterial impact on the reserve amounts. The most significant assumptionsused to calculate the reserve levels are as follows:• Loan documentation requests: Assumptions regarding future expectedloan documentation requests exist as a means to predict future repurchaseclaim trends. These assumptions are based on recent historical trendsas well as anecdotal evidence and general industry knowledge about thecurrent repurchase environment (e.g., the level of staffing and focusby the GSEs to “put” more loans back to servicers). These factors areconsidered in the forecast of expected future repurchase claims andchanges in these trends could have a positive or negative impact on Citi’srepurchase reserve. During 2009 and 2010, loan documentation requeststrended higher than in the prior periods, which led to an increase in therepurchase reserve.• Repurchase claims as a percentage of loan documentationrequests: Given that loan documentation requests are an indicatorof future repurchase claims, an assumption is made regarding theconversion rate from loan documentation requests to repurchase claims.This assumption is also based on historical performance and, if actualrates differ in the future, could also impact repurchase reserve levels.While this percentage was generally stable during 2009, during 2010, Citiobserved a slight increase in this conversion rate, meaning Citi observed aslight increase in the number of loan documentation requests convertingto repurchase claims. However, in the fourth quarter of 2010, Citiobserved an improvement in the conversion rate, meaning that as loandocumentation requests increased, the claims as a percentage of suchrequests have been trending lower.• Claims appeal success rate: This assumption represents Citi’s expectedsuccess at rescinding a claim by satisfying the demand for moreinformation, disputing the claim validity, etc. This assumption is also basedon recent historical successful appeals rates. These rates could fluctuateand, in Citi’s experience, have historically fluctuated significantly based onchanges in the validity or composition of claims. Generally, during 2009and 2010, Citi’s appeal success rate improved from levels in prior periods,which had a favorable impact on the repurchase reserve.• Estimated loss given repurchase or make-whole: The assumption ofthe estimated loss amount per repurchase or make-whole payment, orloss severity, is applied separately for each sales vintage to capture volatilehousing price highs and lows. The assumption is based on actual andexpected losses of recent repurchases/make-whole payments calculatedfor each sales vintage year, which are impacted by factors such asmacroeconomic indicators, including overall housing values. During 2009and 2010, including the fourth quarter of 2010, Citi’s loss severity increased.In sum, and as set forth in the table below, during 2009, loandocumentation package requests and the level of outstanding claims increased.In addition, Citi’s loss severity estimates increased during 2009 due to theimpact of macroeconomic factors and its experience with actual losses at suchtime. These factors contributed to a change in estimate for the repurchasereserve amounting to $492 million for the year ended December 31, 2009.During 2010, loan documentation package requests, the level of outstandingclaims and loss severity estimates increased, contributing to a change inestimate for the repurchase reserve amounting to $917 million for the yearended December 31, 2010. In addition, included in Citi’s current reserveestimate is an assumption that repurchase claims will remain at elevated levels111