Citigroup Makes It Even Harder for You to Get a Mortgage (Update 1)

Citigroup mortgage story updated with statement from Citigroup in second paragraph.

NEW YORK (TheStreet) -- Citigroup (C)just put another nail in the coffin of the supposed housing rebound.

Bank spokesman Mark Rodgers confirmed on Thursday the bank will stop originating mortgages through brokers, stating via e-mail that Citigroup wants to interact directly with mortgage customers so it can sell them other products as well.

The bank's admission that it will stop using brokers has been met with a collective shrug by the mortgage industry. After all, JPMorgan Chase (JPM) already went this route, and Bank of America (BAC) took things a step further late last year, announcing it also planned to stop buying mortgages originated by other banks, a business known as the "correspondent channel."

Banks claim mortgages originated by brokers have performed more poorly than those they originated themselves, according to the Dow Jones report, and it's not hard to believe that's true. It's like the telephone game: the more people involved in passing the information along, the less accurate it is likely to be.

In that regard, the decision by Citigroup, Bank of America and JPMorgan to stop using brokers to originate loans may ultimately be good for the housing market in that it will increase the likelihood that the loans the banks make are good ones.

Still, if you think those broker-originated mortgages get replaced overnight, you are mistaken. According to Dow Jones, which cites data from trade publication Inside Mortgage Finance, Citi originated $3.9 billion of mortgages through brokers in the first three quarters of 2011. For the time being, that's $3.9 billion less available to sop up the flood of foreclosure still pouring into the market.

While other banks, including Wells Fargo (WFC), BB&T (BBT)US Bancorp (USB)and PNC Financial (PNC) are picking up some of the slack, it's not nearly enough to replace the lending capacity being taken out of the system, according to Paul Miller, analyst at FBR Capital Markets.

No wonder the Case-Shiller home price index showed another decline in November, according to data released on Tuesday. With giants like Bank of America, Citigroup and JPMorgan pulling back on the available credit, how could it do anything else?

-- Written by Dan Freed in New York. Follow this writer on Twitter.

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