Citigroup Inc. (C) has altered its plan of shrinking its mortgage business, according to a report in Bloomberg last Friday. The company now plans to increase the purchase of mortgages underwritten by other firms. Additionally, the company intends to have more loans on its balance sheet than it had originally intended.

It is a revelation considering that last year the mortgage unit was placed under Citi Holdings, a division that consists of Citi’s non-core operations which the company plans to wind down or restructure. Also, the losses on mortgages and mortgage-backed bonds were significantly responsible for the company’s $27.7 billion of net losses in 2008.

However, going ahead, management foresees greener pastures in this business. For becoming a full-service consumer bank, a rebuilding of this business becomes necessary.

To attract more customers, the company has recently cut its “jumbo” loan rates by one percentage point. Jumbo loans are loans above $417,000 in most areas. The rate cut is applicable for those loans that are either sold through the bank’s branches or its website. Citi plans to keep jumbo loans that were recently underwritten on its balance sheet.

Additionally, the company plans to double the number of smaller banks and financial institutions to around 300 from which CitiMortgage purchases loans.

In January this year, Citi announced its plan to remove $61 billion in assets from Citi Holdings. Of this, around $34 billion represents U.S. mortgages.

Citi’s fourth quarter 2009 loss from continuing operations of 34 cents per share was in line with the Zacks Consensus Estimate. Though the company’s losses from bad loans declined, losses on consumer and corporate loans increased compared to the prior-year quarter.

However, we are encouraged by the company’s repayment of the government bailout money. While the repayment of the fund through the common stock offering has freed it from any significant government interventions and pay restrictions, this offering leads to significant earnings dilution.

We expect Citi to incur higher credit losses in the upcoming quarters as its restructuring process continues. Moreover, the obscurity around the valuation of Citi Holdings will remain a drag on the shares in the near term.

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