PennyMac and Citigroup: A mutual admiration society

Citibank has agreed to make repo loans to PennyMac Mortgage Investment Trust, collateralized by $125 million in “distressed” residential mortgage loans.

Check out the December 9, 2010, press release. It’s interesting to see one of these deals in action.

This news comes around the same time that Citibank’s parent company, Citigroup, agreed to sell a $441 million package of nonperforming mortgages to PennyMac, according to National Mortgage News.

Here’s what this deal looks like to RepoWatch:

PennyMac is a publicly traded Real Estate Investment Trust formed in 2008, headed by former Countrywide Financial executives, and headquartered in Calabassas, Calif., Countrywide’s former headquarters. PennyMac‘s business plan is to buy distressed mortgages and sell them at a profit.

In this deal, it looks like PennyMac can use the nonperforming mortgages it bought from Citigroup to collateralize a repo loan from Citibank.

Another way of saying this is that Citibank gave PennyMac the money to buy the troubled loans from Citigroup.

Citigroup spokesman Alex Samuelson declined to comment beyond the information contained in PennyMac’s December 9 press release, which PennyMac filed with the Securities and Exchange Commission.

Citibank will not have to raise capital, or equity, to cover the 364-day repo agreement with PennyMac because the agreement is with an off-the-books Citibank trust. Regulators do not require additional equity for off-balance-sheet commitments with a maturity of less than one year.   

 So Citicorp gets rid of nonperforming mortgages it has to have extra capital for, and its commercial bank gets a nice profit-making repo that requires no capital, and gradually the corporate balance sheet gets cleaned up.

RepoWatch likes the way bank consultant Karen Patrou described the 364-day deals in September 2009:

Banks figured out from Day One in 1988 — when Basel I began — that the treatment of off-balance-sheet assets was a wide-open invitation to regulatory arbitrage. The rules then — and amazingly still now in the U.S. — have no capital charge for any off-balance-sheet commitment with a maturity of less than one year. Shazaam — the world of 364-day commitments was born. From this came structured investment vehicles and so much else that brought banking to its knees….

In the PennyMac press release, the amount of the Citibank repo loan is not disclosed except that it will be a percent of the market value of the collateral. If the market value falls, as it did so dramatically in 2007 and 2008, PennyMac will have to put up more collateral.

PennyMac also has to maintain:

-a minimum tangible net worth of $300 million,
-a minimum of $10 million in unrestricted cash and cash equivalents,
-a maximum ratio of total liabilities to tangible net worth of less than 3:1; and
-profitability for at least one of the previous two consecutive fiscal quarters, as of the end of each fiscal quarter.

PennyMac will pay Citi interest on the loan and fees for structuring and managing the deal.


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