Fed Acknowledges Error in Citi's Stress Test The Federal Reserve made an error in its stress test of Citigroup that led it to overstate a crucial measurement of losses on the bank's mortgages, the central bank acknowledged on Friday. The Fed also issued corrections for Bank of America, Ally Financial, MetLife and Wells Fargo. It said the corrections did not change the capital ratios projected by the stress tests, which estimated the losses that a bank could bear amid situations that include a severe recession and a market meltdown. The tests, published on Tuesday, calculated how much a bank's capital would be affected assuming losses on a range of loans and securities over a 27-month period that concludes at the end of 2013. Still, Citigroup did not do as well as its big-bank peers in some tests. The revisions at Citigroup were for the most part bigger than the amendments at the other financial firms. In the original test results, the Fed projected losses on Citigroup's first-lien home loans that would be equivalent to 9.7 percent of its total mortgages. But the Fed now says that the loss rate is 9.3 percent. The change occurred after the Fed moved projected losses on Citigroup's foreign mortgages to another category. As a result, the 9.3 percent loss rate is just for mortgages in the United States. The change seems small but it signals that the Fed failed to include nearly $40 billion of foreign mortgages in its loss-rate calculation for Citigroup's mortgage. Initially, the Fed projected $9.3 billion of losses on what looked like all of Citigroup's mortgages, producing the 9.7 percent loss-rate. The Fed appeared to be assuming that Citigroup had around $96 billion of mortgages, since $9.3 billion is 9.7 percent of $96 billion. But securities filings show that Citigroup had $133 billion of mortgages at the end of September 2011, which was when the Fed started the test. That total combined $95 billion of American mortgages and $38 billion of international mortgages. And something else didn't appear to add up: Applying the Fed's dollar losses of $9.3 billion to Citigroup's actual mortgage total of $133 billion produces a loss rate of 7 percent, far lower than the 9.7 percent in the original test. That would put Citigroup more in line with the Fed-forecast mortgage loss rates of 6.7 percent for Bank of America, and 6.3 percent for JPMorgan Chase. Dropping the loss rate to 7 percent would have made Citigroup's mortgages look healthier. Now that the Fed has corrected its results, why didn't the mortgage loss rate fall to 7 percent, instead of falling to only 9.3 percent on domestic mortgages? That seems to be because the Fed is not including foreign mortgages in that loss-rate calculation. The low projected loss rates for those loans are now counted in a category called "other loans." "We will continue to work with the Federal Reserve regarding these numbers," a Citigroup spokesman said on Friday.