UPDATE: Investors Sue Citi Over Poor RMBS Underwriting -Citi

Citigroup (C) revealed in a regulator filing Friday that several investors have sued the bank over misstatements or omissions in its underwriting of residential mortgage-backed securities.

The Charles Schwab Corp. (SCHW), the Federal Home Loan Banks of Chicago and Indianapolis, Cambridge Place Investment Management and other investors filed suits against Citi and some of its affiliates since July.

Essentially, the plaintiffs seek damages for loans that were part of mortgage securities but fell short in some way to what has been described in the original representation and warranty regarding these loans.

In its regular quarterly filing with the Securities and Exchange Commission, Citi said "the subprime-mortgage-related proceedings described above are in their preliminary stages," and wouldn't estimate on the range of loss expected.

The suits parallel a case that a group of key players in mortgage market seeks to file against Countrywide, now part of Bank of America Corp. (BAC).

That effort--led by Allianz SE's (ALV.XE) Pacific Investment Management Co., the world's largest bond fund, and including BlackRock Inc. (BLK), the Federal Reserve, Freddie Mac (FMCC), Metropolitan Life Insurance Co., Neuberger Berman Europe and Western Asset Management Co.--was seen as the first to try to build a case based on the common belief that mortgage underwriting at the height of the boom was slipshod, and poor documentation prevalent.

Citi's disclosure Friday confirms that other groups are pursuing that thesis.

If any of the Citi suits prove successful, they could set a precedent that would allow other investors try to recover compensation from mortgage lenders.

So far, the government mortgage agencies Fannie Mae (FNMA) and Freddie Mac have been successful in getting banks to take back poorly underwritten loans, but that is primarily because they buy delinquent loans out of mortgage pools and go back to trace how the loan was put together.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468; [e-mail].