Jan 06
2009
Everything Finance
Dear Citigroup
Jonathan Parker
Dear Citigroup,
In these turbulent times who doesn’t need additional capital to get through these cold winter months? Because of your strong record of providing banking services to me, I would like to offer you a special opportunity to raise capital and gain liquidity in one easy step. This offer is available only to you, and it is only available for a short time.
As you know, you are the proud owner of my mortgage. As a result you receive several thousand dollars a month from me. I am sure this helps your income statement! I am a great credit risk and this mortgage should be providing you with a great return. Sadly, I am guessing that you, like many banks in these hard times, have actually lost a lot of money on my mortgage. (Phooey on those mark-to-market rules.) We both know the troubling fact is that market values of mortgages have declined precipitously, and as you well know, my mortgage is a nonconforming mortgage. Even some AAA mortgage backed securities are trading at steep discounts, something like 50 cents on the dollar. This puts the market value of my mortgage at around half the outstanding balance.
But I am willing to buy my mortgage from you at above its market price! I am offering to buy that asset that is stuck on your books at about 50 cents on the dollar for 60 cents on the dollar. That’s right, you can sell an illiquid asset, gain hundreds of thousands of dollars in liquidity, and lower your risk of bankruptcy with one easy transaction.
In the future, you will of course not get my loan payments, but once you have sufficient capital, you can turn around and make a very similar mortgage loan at any point – rates are even currently very similar to my current rate.
So don’t sit around waiting for a government bailout! Make you and your stockholders happy. Call me now to take advantage of this exciting offer.
7 Comments
Jan 6 2009
So why isn’t Citibank sending the reverse letters to people like me offering us the opportunity to buy back our mortgages for even 90 cents on the dollar? Is there a market failure? Is Citibank stupid? I see three answers.
First, Citibank may only service my mortgage or only own a piece of it. If there are a large number of owners of a tranched mortgage pool of which mine is a small piece, it may be hard to co-ordinate those owners to make these offers. Doubly hard if one of the owners owns only the last ten cents to be recovered on each dollar, since that person would lose everything under the 90-cents-on-the-dollar buyback plan.
Second, Citibank owns some mortgages that will be paid off in full and some that won’t. They are not sure which is which. If they send the letter out and the only people who take their offer are those who would have paid off in full anyway, then they have written down only those mortgages they did not have to, and continue to be stuck with exactly those mortgages that will not perform in the long run.
Third, Citibank may be counting on government assistance. If they can get bailout funds, then they can ride out their cash-flow problems and see what happens with their pool of mortgages. If they turn out terribly, the government is there to help. If they perform pretty well, then Citibank’s managers and stockholders make profits. So the government may be slowing private sector responses, and so taxing me to pay Citibank so they do not write down my mortgage. Ugh.
Jan 6 2009
This idea is in practice in Denmark—The Economist has a nice article about the Danish mortgage market: http://www.economist.com/finance/displaystory.cfm?story_id=12855447
Jan 15 2009
If they did offer this option, I am sure somebody would be able to get a loan to repay the Citibank, perhaps from the Citibank itself and using their house as a collateral:)
It seems that such program would most certainly lead to the outflow of “good” mortgages. Those who have the money or who are able to get a loan elsewhere to repay Citi are less likely to default on their mortgages anyway. As a result the remaining Citi mortgages on average would be an even riskier asset and the price of these remaining assets should continue to deteriorate. I agree though that this is one of the ways to raise money by selling off the good assets.
Jan 27 2009
Jon, you make a great point, but must accept the reality that in this market, people who pay their mortgages on time will continue to remain on the hook. I receive calls all the time from potential borrowers that want to refinance, to take advantage of the rock bottom interest rates being offered in the market at the moment. Often times their equity is zero or they’re upside down. Since they have great credit, and have not missed any payments on their current home loan, their current lender will not accomodate their request. Yet at the same time, home owners that have messed up their credit and are several months behind on their mortgage, are being offered loan modifications by these same lenders. The tough pill to swallow is that responsible homeowners are being penalized, while poor decision makers are being rewarded.
Feb 6 2009
Jonathan, Citibank is stupid!
You offer clearly some out of box application that would bring cash to a cash strapped company with illiquid brain capital at the top.
They act like someone stuck in a burning house and all they can do is suck their thumbs.
Then you go on to come up with seemingly valid execuses why they do suck their thumbs while all hell breaks out.
Ever heard of a phone?
So you get on the horn an explain to other thumb suckers holding the mortgage pool that hey I’ll go out to the dollar store and buy you some baby pacifiers if you’ll only take your thumb out of your mouth and remember the first law of business, Cash Is King!
Apr 24 2009
Corporate America needs to stop ignoring us, the consumers and producers of society. We are the backbone of this country. Not congress, and not the Fed.
If Citibank and all these other sinking industries had come to me, the homeowner, an entrepenuer who saves diligently for such situations, I would have accepted their offer in a heartbeat.
My two cents…
Sep 2 2009
if citicorp goes out of business, do i still have to repay a loan that i have when i purchased furniture from Rooms to Go?