CitiMortgage and the Department of Housing and Urban Development's Office of Inspector General (OIG) are at loggerheads over the proper way to vet at-risk borrowers for the Federal Housing Administration's (FHA) short sales program.

OIG auditors contend the O'Fallon, Mo., based mortgage company has not properly determined borrowers' eligibility for the program and CitiMortgage should reimburse FHA for 63 claims totaling $5 million.

"Citi disagrees with the findings, and we are confident that all appropriate guidelines and procedures were followed accordingly," said CitiMortgage spokesman Mark Rodgers.

The nation's fourth largest servicer argues that OIG's interpretation of FHA's requirements for pre-foreclosures sales (PFS) is too strict and their implementation would slow down and "negatively impact" the short sale program that allows borrowers to avoid foreclosure.

"The findings of the HUD OIG report are based on the auditor's interpretation of the guidelines outlined for the PFS Program, which are not aligned with CMI's interpretation of these guidelines," CitiMortgage Inc. says in a written response to the OIG report.  

Citi insists it has relied on FHA mortgagee letters and advice from the FHA National Servicing Center in establishing policies for accepting borrowers into the PFS program.

But the OIG auditors contend Citi lacks adequate policies for accepting borrowers into the short sales program. And they point out some interesting results of Citi's policies -- such as borrowers who are current on their mortgage payments defaulting after they entered the short sales program.

OIG contends borrowers should be in default as the result of an adverse and unavoidable financial situation before they are eligible for the short sales program.

Citi counters that servicers should consider each borrower's entire current situation, as well as future anticipated hardships and circumstances. 

FHA guidance said: "Mortgagees may exercise their discretion to accept applications from mortgagors who are current but facing imminent default." 

It is up to the FHA commissioner to decide who is right

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