* Former Citi underwriter warned of "defective" mortgages
* Testifies to U.S. panel about 2007 email to Rubin
(Adds Bushnell testimony, detail of Bowen's warnings)
NEW YORK, April 7 (Reuters) - A former Citigroup Inc (C.N) senior underwriter warned senior managers including Robert Rubin that the bank was selling problem loans to investors as the mortgage market peaked and deflated, the executive testified.
Richard Bowen, a former business chief underwriter for Citigroup, said on Wednesday that he warned the bank's senior executives of problems with most of the prime mortgages it sold to Fannie Mae FNM.N, Freddie Mac FRE.N and other investors beginning in 2006.
Bowen's testimony before the Financial Crisis Inquiry Commission painted a picture of a bank that cared little for underwriting standards even as a massive credit crisis was looming.
While other Citigroup executives blamed unexpected economic events for the more than $100 billion of credit losses and writedowns the bank took during the credit crunch, Bowen pointed out problems internal to the bank that contributed to its problems.
"I continued to warn management, through 2007, of ... risks to the shareholders posed by the increasing defective rate of mortgages ... and (Bowen's group) continued to purchase and sell increasing volumes of defective mortgage product," Bowen said.
Bowen was a small cog in a big mortgage machine. He oversaw 220 underwriters in a group that bought mortgages made by other lenders. Those loans were in turn sold to other investors. Bowen's job was to make sure the loans met Citi's credit standards.
Often, they did not. In mid-2006 Bowen discovered that over 60 percent of the home loans his group bought and sold were defective, meaning they were not underwritten to Citigroup's stadards, or did not have all the required documents. By 2007, that number swelled to more than 80 percent.
"During 2006 and 2007 I witnessed many changes to the way the credit risk was being evaluated," Bowen said.
"These changes included the Wall Street Chief Risk Officer's reversing of large numbers of underwriting decisions on mortgage loans from 'turn down' to 'approved,'" Bowen added.
WARNINGS TO RUBIN, OTHERS
Bowen warned a number of managers at Citigroup. On Nov. 3, 2007, Bowen sent an email to Robert Rubin and senior finance and risk management executives at Citigroup with the subject line "URGENT -- READ IMMEDIATELY -- FINANCIAL ISSUES."
"The reason for this urgent email concerns breakdowns of internal controls and resulting significant but possibly unrecognized financial losses existing within our organization," Bowen wrote.
Rubin, the former chairman of the executive committee of Citigroup's board of directors, is scheduled to testify before the U.S. panel on Thursday. The crisis commission is examining the causes of the credit crunch that began in 2007.
Bowen requested an investigation "conducted by officers of the company outside of the Consumer Lending Group." He addressed his email to Rubin, Chief Financial Officer Gary Crittenden, Senior Risk Officer David Bushnell, and Chief Auditor Bonnie Howard.
Citigroup spokeswoman Shannon Bell wrote in a statement: "The issues raised by Mr. Bowen were promptly and carefully reviewed when he raised them and corrective actions were taken."
Bowen's manager agreed with some of his objections. But by early 2007, he testified, all of his manager's responsibilities were reassigned.
Bowen continued to issue his warnings, but Citi "continued to purchase and sell increasing volumes of defective mortgage product," he said. "The overall defective rate increased to over 80 percentage in 2007."
In separate testimony before the commission, Bushnell cited widespread industry ignorance about the looming housing danger in 2006 and 2007.
Citigroup's "risk models, like those of most major financial institutions, tested for what were believed to be extreme loss scenarios for residential real estate," Bushnell said in prepared testimony.
"Clearly, Citi and virtually all other market participants failed to anticipate the dramatic and unprecedented decline in the housing market that occurred in 2007 and 2008."
Bowen, who said during his testimony that he left the bank in January 2009, sent his 2007 email to Rubin and Bushnell a day before an emergency meeting of the Citigroup board of directors. At that meeting, which had been called in October, Chief Executive Charles Prince resigned.
Prince is also due to testify before the committee on Thursday.
(Reporting by Maria Aspan and Dan Wilchins; Additional reporting by Corbett B. Daly; Editing by Richard Chang, Phil Berlowitz)