The foreclosure fiasco is lingering longer than many people expected, thanks mainly to the sorry state of  mortgage documentation at lenders and services. Citigroup (NYSE:C) is an apt case study. Freddie Mac has determined that 15 percent of the performing loans Citigroup sold to the GSE in the second half of 2009 and the first half of 2010 had basic document flaws, such as a missing appraisal, income miscalculations, missing documentation to verify payment on other loans, missing proof of flood insurance and various "eligibility" issues, Bloomberg reports.

According to a Freddie Mac memo: one loan was for an amount in excess of the "maximum loan amount" and another was booked as a regular refinancing when in fact it was a "construction to permanent financing loan." That's quite a gamut, but typical of other lenders, I would think.

The defect rate strikes many as high. An accepted rate might be closer to 5 percent.

All in all, this represents a significant amount of putback risk for Citigroup and others, which has clouded the outlook for the industry and will likely lead to higher reserves. One analyst says this putback risk to Citigroup is $100 million.

An issue now is whether banks are faring any better in their mortgage processes and whether their efforts will be enough to gain support from judges in states where they must rule on foreclosures. For now, it looks like the fiasco will continue. As bad as it is at Citigroup, it may be even worse for Bank of America, Wells Fargo and other big players.

For more:
- here's the article

Related Articles:
Foreclosure slowdown good or bad for the economy?
New Jersey judge to suspend foreclosures?
Putbacks could cost top banks $43 billion
Fannie Mae, Freddie Mac's role in foreclosure fiasco