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Tuesday, July 21, 2009

Odd Mortgage Refinancing Sighting

This is admittedly one data point, but one has to assume that Citi is making similar calls to others similarly situated. From a reader:

I had an interesting conversation yesterday with a neighbor of mine. He said that he and his wife received a call from Citibank offering to refinance their mortgage at a lower rate. What’s interesting about that is that (1) he and his wife are and always have been current on their 6.75% thirty year fixed mortgage (indeed, they make extra payments regularly to reduce principal); (2) their house value is still above the mortgage — i.e. they are not upside down; and, (3) they don’t understand why Citibank would offer them refi at closer to 5% given Citi’s financial condition (and, by the way, the fees for doing the refi are minimal). So, the question is, why is Citi doing this? Any ideas?:

The only thing I can think of is that Citi is under pressure to show the government that it is doing refis. Or perhaps there are more attractive (to Citi) other terms in the new mortgage, but I can’t imagine they’d be enough to make up for the large rate differential. Or perhaps Citi recognizes they may refi given the rate differential and is calling pre-emptively to make sure if this couple does refinance, that Citi is at least in the running to get the refi. But theories two and three strike me as a stretch.

Any thoughts?

Topics: Banking industry, Real estate

Email This Post Email This Post Posted by Yves Smith at 1:27 pm

33 Comments » Links to this post

33 Comments:

  • Anonymous says:
    July 21, 2009 at 1:44 pm

    They get fees for closing, more cash over the short term, less over long.

    They also might not own the loan and are basically taking it out of a securitized pool and bringing it in house.

  • Bill says:
    July 21, 2009 at 1:45 pm

    My guess is the loan is securitized, so the reduced interest payments do not impact Citi.

  • Anonymous says:
    July 21, 2009 at 1:47 pm

    What anonymous #1 said. Citi almost certainly has no interest in the loan. If it originated the loan, it has long since securitized it. And it may not have originated the loan.

    If the fees are limited and Citi initiated the transaction, my guess is that they'll take their profit on the spread between their offer and what a proactive homeowner could get on the open market.

  • Yves Smith says:
    July 21, 2009 at 1:56 pm

    Anons,

    My understanding is servicing agreements are written PRECISELY to bar that sort of thing. Rules around substitution are very strict. The last thing investors want is Citi doing what is happening here, offering to substitute lower rate paper into the same mortgage vehicle, and collect fees in the process.

  • kim_mondelli says:
    July 21, 2009 at 2:00 pm

    I'd confirm that it was actually Citi that made the call. There have been a number of instances of mortgage fraud …

  • Anonymous says:
    July 21, 2009 at 2:04 pm

    Probably needed some good AAA credit loans to pad some not so good subprime loans into some new and supposedly improved MBS instrument.

  • jdrennan says:
    July 21, 2009 at 2:05 pm

    I had a similar experience with an auto-loan taken out through Chase. they called and asked us to refi – including covering the costs – and moved us from JPMC into the Bank One entity.

    I assumed it was the local branch trying to make loan origination figures.

    I was also wondering if they weren't afraid of being accused of predatory lending. Our loan was only 3 months old, but they cut it from over 7% to 3.5%.

  • SunnyD says:
    July 21, 2009 at 2:06 pm

    1. Administration wants to show more refis that are successful. Refi-ing debtors 3 months delinquent don't exactly help the Administration's metrics.

    2. Servicer incentives require 3 years of successful payment post-modification. As such, you want to refi the best applicants.

    The weird thing about Citi is that Citibank is under the FDIC modification plan for the loans on its books, but CitiMortgage is under the Obama plan.

  • TenaciousG says:
    July 21, 2009 at 2:06 pm

    I too received a similar notice in the mail but from Wells Fargo offering to refi my mortgage from 5.825 to 5.25% I also have never missed a payment and often pay down principal when possible. I had the same questions as you – why would they be offering this? I generally understood that you need at least 2% less than your current rate (after fees) to make the refinance worth while.

    Sounds like more games being played.

  • Anonymous says:
    July 21, 2009 at 2:09 pm

    I could have the legal issues wrong here, but I thought I read somewhere that first mortgages were non-recourse (meaning the house was the only asset the bank could seize if you default), whereas refi's were recourse (meaning the bank can go after you for everything you own if you default). Could this make the value go up by driving down the risk?

  • Anonymous says:
    July 21, 2009 at 2:10 pm

    If in a non-recourse state like California, it will change the mortgage from a non-recourse to a recourse loan.

    Non-recourse allows owner to walk away w/o the bank garnishing wages etc.

    Recourse means the owner not only lose the house but now are hounded unless filing for bankruptcy.

  • Marc Cote says:
    July 21, 2009 at 2:14 pm

    Sounds to me like someone needs to whack Citi over the head. They raised the interest on all four accounts my wife and I have with them and we have not missed nor been late with a payment in the last 9 years. I closed two of the accounts because of this and will never do business on a new account with Citi again.

  • "Mindles H. Dreck" says:
    July 21, 2009 at 2:19 pm

    Citi thinks the borrower is upside down.

  • Anonymous says:
    July 21, 2009 at 2:27 pm

    Like someone mentioned above, mortgage fraud is on the rise. Was it really Citi. More likely, The refi department has revenue targets it has to meet for the managers/directors/VPs to get their bonuses, who cares if its bad for Citi in the long run.

  • Anonymous says:
    July 21, 2009 at 2:36 pm

    You are cynical enough.

    They are doing this knowing full well the borrower won't bother with a refi. Another one to accumulate into the overall modification-failure numbers so that Citi can show how ineffective mortgage mods are in order to increase their case in asking for more government money.

  • Keith - Hermosa says:
    July 21, 2009 at 2:37 pm

    Occam's Razor. It wasn't Citi that called.

    There would be a very reasonable fee in return for this amazing act of kindness by the bank, but then the new rate wouldn't show up on the statements and the neighbors who got the offer that was too good to be true would be crying about how they got ripped off.

  • Anonymous says:
    July 21, 2009 at 3:05 pm

    Theory three sounds right on to me. Anyone with good credit and a 6.75% mortgage who isn't looking to refi has a serious attention deficit disorder. It takes much less than a 200 basis point spread to make the refi a good deal, particularly in a competitive market.

  • Michael says:
    July 21, 2009 at 3:19 pm

    I used to manage a bank branch for a large bank. We would regularly look at our customers with higher rates and proactively contact them to discuss refinancing options because we were paid a bonus on new loans. (Yes, the refinance was considered a new loan). Management at the bank was fine with doing this. They told us that the customer would refinance with someone else if we didn't do it.

  • donna says:
    July 21, 2009 at 3:19 pm

    Citi is simply evil. Whatever they want, it's evil.

    Don't deal with Citi! Evil!

  • Anonymous says:
    July 21, 2009 at 3:20 pm

    My dear friends across the Atlantic Ocean, I'm not qualified to comment this issue, but I can tell you that your banks are rippin' you off. Even 5% seems to me preposterous for a borrower with top rating. Here in Switzerland only the foolhardy who locked-in for ten years in 2006 pay more than 4%, there are no fixed rates for more than ten years, and today you can refinance at 3 month libor + 0.6% (total 1 %), 2 years fix 1.8%, 5 years fix 2.1%. Well I guess they need the spread to climb out of their black holes, but I smell market rigging.

  • Anonymous says:
    July 21, 2009 at 3:30 pm

    This isn't new. About 10 years ago Wells Fargo made the same overture to me, totally unsolicited. And the refi was all done by mail and with minimal fees. I kept looking for the catch, but never could find it! I ended up deciding they thought I was going to take my business somewhere else since rates were dropping.

  • Anonymous says:
    July 21, 2009 at 3:47 pm

    I am really suprised to see this as Citi sebt out a ton of notices to it credit card holders that there rates will be increased. I had 5.74 and 7.94 am now being told my rate will go to 29.99 and I can close my accounts if I don't like and in the same sentance I have excellent account history.

  • carol765 says:
    July 21, 2009 at 3:56 pm

    Please listen to Meredith Whitney, in her CNBC interview Monday last week, first clip linked on this blog "is meredith whitney bullish now", especially from 3:50 – 7:00

    She calls it unbelievable: the billions of taxpayers money to servicers for refi's, the accounting gimmick that is taking place (banks can upgrade the loans on their books based on the successes of their refi's), and she refers to a little noticed rule change on May 20th: investors with securitized mortgages can no longer sue the servicer for loan mods!! Before May 20th they could sue servicers for breach of contract. Not anymore. She predicts a 10-fold increase in refi's, and refers to banks seeking to modify mortgages which have not yet defaulted. The neighbour of the reader may be one of them.

  • Anonymous says:
    July 21, 2009 at 3:59 pm

    My regular bank (not my mortgage bank) called me with a similar offer. It was just before the rates went back up. I couldn't figure out what the plot was except that 1.) I've never missed a payment 2.) My house is still worth a lot more than I paid for it or what I still owe on the loan and 3.) otherwise, they might have to refi less worthy mortgages. I'm a good risk.
    But the interest rate they were offering still wasn't low enough by my standards. I felt like they were going to get a really good deal and there wasn't enough incentive for me to refi so I didn't.
    Shortly afterwards, the rates jumped. I don't know if the rate they offered me was guaranteed so maybe it's better I passed. It just seemed to me that I was low hanging fruit to them.

  • Minh says:
    July 21, 2009 at 5:19 pm

    The only thing I can think of is that Citi is under pressure to show the government that it is doing refis.
    Any thoughts?
    It's probably a stategy from the FED, who provides the liquidity to Citi under the condition that they must improve the performing rate of the loans, which means Citi must reduce the risk almost unconditionally. A side effect of this is the consumer would have more cash on hand to stimulate the economy without a explicit tax-cut from the government.

  • Anonymous says:
    July 21, 2009 at 5:50 pm

    This Mortgage may be a Fannie Mae Loan being serviced by citi. So now citi is offering to refinance it and then take it in their books, so that the fat profit of 5% differential goes to Citi.

  • Anonymous says:
    July 22, 2009 at 12:20 am

    and if the RE market tanks further……?

  • Anonymous says:
    July 22, 2009 at 12:43 am

    Or it could be something less insidious. How long do the borrowers have left on their amortization schedule? A new 30 yr. loan at 5% will pay more interest over the course of a loan than an existing mortgage at 6.75% with only 10 or 15 years left.

  • RPB says:
    July 22, 2009 at 12:44 am

    Closing fees and the dog and pony show for Uncle Sugar. Go to a credit worthy borrower and satisfy the quota. Makes perfect sense.

    Also, if the loan does not originate from Citi, it is able to bring more higher credit assets to its books to offset some of its "les garbage."

  • theadr says:
    July 22, 2009 at 3:02 am

    Citi picks up badly needed cash of $2,000 per from Uncle Sam for the refi. Do a million, that's $2B. Borrower, based on repayment history and adequate collateral, is as risk-free as they come, even more so now with the better rate. Spread to Citi is better than the original due to the lowest fed funds rate on record. Recourse non-recourse not a consideration in the business model, default is highly unlikely, say 15% based on the parameters indicated, in this economic state (depression). Citi gets badly needed positive press, on government program and "new" business. Get to live another six months, long enough for bonuses.

  • Tony Arko says:
    July 22, 2009 at 10:58 am

    Citi can call this action a "loan modification" and add it to the total when they report they are "helping homeowners" and justifying the billions of taxpayer dollars they are using. It is another way they are gaming the public with bogus statistics.

  • steve says:
    July 22, 2009 at 11:35 am

    Perhaps the new one has fees against prepayment, so they'll make more on borrowers who fit that profile. Call me paranoid.

  • Anonymous says:
    July 22, 2009 at 3:02 pm

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