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is beginning to reap rewards from the housing recovery.

The nation's third largest bank is beginning to see a significant improvement in the performance of its North America mortgage portfolio. Net mortgage credit losses in the first quarter stood at $630 million, declining 17% quarter-over-quarter and 33% year-over-year.

In a sign of its improving outlook, the bank "released" $375 million of its substantial mortgage loan loss reserves as it anticipated fewer delinquencies in the future.

The move is significant because Citi had been relatively slow to release its roughly $8 billion in mortgage loan loss reserves, even though analysts have pointed out that the bank is abundantly covered for losses.

CFO John Gerspach has been a bit more skeptical of the housing recovery than his peers and has been looking for more evidence of a sustained improvement in home prices. Reserve releases in the past have mostly been used to offset costs under the national mortgage settlement.

During a media conference call on Monday, the CFO said the bank decided it was time to release reserves as delinquency rates had seen strong declines for two straight quarters. First-quarter residential first mortgage and home equity loan delinquencies dropped to 6.09% from 7.48% in the fourth quarter and from 8.55% a year earlier.

"If credit performance continues to improve and housing remains stable, we will begin to increase the utilization of reserves through the year," he said.

The recovery in housing might also have further implications for the bank's strategy to dispose mortgage assets.

Citi's North America Mortgage Portfolio is part of Citi Holdings, the non-core arm of the bank that is in wind-down mode. Through a combination of asset sales and loan runoffs, the mortgage portfolio has shrunk from $120 billion two years ago to $86 billion at the end of the first quarter.

The pace of asset sales has been slowing, as Citi has been reluctant to do bulk sales at deep discounts.

With the performance of the mortgage portfolio improving and the drag from Citi Holdings being reduced -- net losses at the non-core arm were down 22% quarter-over-quarter to $788 million -- the bank may feel less urgency to sell its mortgage assets.

However, Gerspach said the bank remains active in selling "at the right price," noting that it generated $2.8 billion worth of sales from the mortgage portfolio.

The housing recovery has also contributed to improving prices for mortgage assets. "We have seen an improvement in pricing for all mortgage assets, whether it is nonperforming loans or re-performing modifications. Prices are up 5 to 10 percentage points," the CFO said. "If we can sell at the right price, we are still active sellers. If not, we will let it run off and wind it down. We have got adequate reserves for that."

-- Written by Shanthi Bharatwaj in New York.

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