Jan. 13: Citi’s Project Bora Bora; A primer on MBS pricing; a note from a HECM/reverse fan; a good joke for your real estate agents

If you’re a whiskey or Celtic folk song fan, here’s a little something for you to lead off the Saturday Commentary. Switching continents, remember, “Yo quiero Taco Bell!”? Does Taco Bell count as a Mexican restaurant? I am a fan of melted cheese, corn, cumin, tomatoes, beans, and chili powder, in some combination. 1 in 10 restaurants in the U.S. serve up Mexican chow, maybe because they provide the “dining out” experience without as huge a price tag as other places?! A new analysis of SafeGraph data found that 85 percent of counties in the United States have at least one Mexican restaurant, and only 1 percent of the American population does not live in a county without at least one Mexican joint. Texas and California combine for 40 percent of Mexican restaurants in the U.S., and Los Angeles county has the most of any county in America, with 5,484 Mexican restaurants. Florida, New York, and Illinois all have 4 percent each of America’s Mexican restaurants, meaning that 51 percent of all Mexican restaurants in the U.S. are in those six states.

Citi’s turn to scale back in the coming years


On its earnings call, Citigroup announced the elimination of 20,000 jobs, or 10 percent of its workforce, after announcing a net loss of $1.8 billion in the fourth quarter. Citigroup will cut about 20,000 jobs over the next three years as part of its previously announced restructuring.

The cuts, which were detailed in Citi’s earnings report on Friday, could save the company as much as $2.5 billion. The bank also said it had suffered a “very disappointing” Q4 in 2023, partially due to about $780 million in restructuring charges “related to actions taken as part of Citi’s organizational simplification.”

Recall that Citigroup had said in September it would be overhauling its corporate structure and cutting management layers, which was expected to include job losses. Internally, the initiative is known as “Project Bora Bora,” and employees have discussed cuts that could amount to at least 10 percent of the company’s workforce in several major businesses. Redundancies related to the overhaul began in November, according to reports.

What’s the big deal with reverse mortgages?


Dan Hultquist, Director of Reverse Mortgage Communications at Movement Mortgage and author of two published books on the topic (Understanding Reverse and Navigating Reverse), writes, “Regarding your industry vet’s comments in the January 6 Commentary, it’s sad to me that much of the real estate and mortgage industry are still unaware of the unique protections and advantages of the HECM product.

“For example, anyone shopping for a proprietary reverse mortgage because they didn’t want to pay the ‘astronomical’ Initial Mortgage Insurance Premium (IMIP) of the HECM should first be shown a side-by-side comparison, generated in minutes, showing the HECM to be the better product. Yes, there are fees. But what you get in return is access to your housing wealth, with a non-recourse loan, at competitive interest rates, and without a required monthly principal and interest mortgage payment.

“It is important for the broader mortgage industry to know that the HECM is a fantastic addition to a comprehensive retirement plan. It just takes time to learn the nuances of the product. As a top-selling author on the topic, I will most definitely obtain a HECM at age 62. I’ll do it even though it is unlikely that I’ll need it. The math is undeniable. When a competent reverse mortgage professional works with a CPA or Financial Planner that understands the product, the result should be 1) more cash flow, 2) more liquidity, 3) lower taxes, and sometimes 4) higher net worth.

“Regarding the comment about eliminating the HECM-to-HECM Refinance option, yes this was discussed a few years ago. However, HUD rejected its own proposal. But even if it had been implemented, it would not prevent a homeowner from refinancing their HECM. It would simply prevent a refinance that contributes no Initial Mortgage Insurance Premium (IMIP) back to FHA.

“Lastly, many reverse mortgage professionals reached out to me about the comment that they are the new ‘subprime mortgage sleazebags.’ Nothing could be further from the truth. Those who specialize in helping older homeowners age-in-place are some of the most compassionate and sincere financial professionals I’ve met. Many of them work long hours trying to help seniors age with dignity, helping them experience more in their retirement years.

“The reverse mortgage fails not because it is an ineffective solution, but because it is unfairly discounted as complex and dangerous. Still, nearly 90 percent of reverse mortgage recipients report being satisfied or highly satisfied with the product. That message is rarely heard. So, we try to dispel reverse mortgage myths and misconceptions one person at a time.”

Dan finished up with, “Thanks for giving me the opportunity to address the grievances of your subscriber. Hopefully, we’ll make more progress educating the broader mortgage industry in 2024.” Thank you!

The A B Cs of mortgage securities, for dummies like me


What’s the difference between government bonds and men? Bonds mature.

Don’t worry… I won’t make your eyes glaze over. The question always comes up, “Rob, when my capital markets staff says, ‘Bonds are going down’ do they mean in price or yield are going down?” Price is not the same thing as yield. But usually if someone in capital markets says that “The market is going down” that typically means that mortgage-backed security prices are going down, and rates are going up.

I’ll give you an example. Let’s say a year ago MBS investors were buying 3 percent Freddie and Fannie securities at par, or 100, or dollar for dollar. Now, however, they can buy those same securities and earn 6.5 percent.

Why would anyone want to earn 3 percent when they can earn 6.5 percent on their money? No one would. But what if they could buy those 3 percent securities, not at a price of 100, but at a price of 85 or 90 cents on the dollar? And that discounted price gives an investor a yield of 6.5 percent?! At that point, an investor may be indifferent about buying a new bond yielding 6.5 percent at 100 or an older bond yielding 3 percent at 85.

But wait, there’s a little more! Which one is going to be on the books longer? Or has less credit risk if the economy moves into a recession? That is reflected in the value of the servicing, so even though the price of the bond can be calculated mathematically, the actual price of the MBS will be influenced, or muted, by other factors.

That’s the basic reasoning in the price/yield discussion. But moving on to some bond basics, mortgage-backed bonds consist of pooled mortgages on real estate, residential mortgages in our case. But investors in fixed-income securities have other options and may shift their purchases and holdings based on minute differences in the perceived value of various instruments. Short-term U.S. Treasury Bills, longer-term Treasury securities (notes and bonds), Treasury Inflation Protected Securities (TIPS), municipal bonds issued by cities and towns, Agency Bonds sold to fund federal agriculture, education, (and mortgage lending programs), corporate bonds issued by companies, junk bonds (typically corporate bonds), and convertible bonds (corporate bonds that can be converted into stock at certain times throughout the term of the bond), are all out there in various ways.

Many bonds are issued for a specific length of time, called the “term to maturity.” A fixed amount of interest gets paid to the investor every six months or year, and the principal investment gets paid back at the end of the loan period, on what is called the maturity date. In some cases, the interest is paid in a lump sum on the maturity date along with the principal investment funds. But MBS are different: borrowers may refinance or sell their home and pay off their portion of the MBS.

In general, bonds in the secondary market are priced based on their interest rate, their maturity date, and their bond rating. Notes with higher interest rates and more years left until maturity are worth more than those with low rates and those that are nearing maturity. But as noted a few times above, MBS have the added complexity of prepayment risk influencing the prices that investors will pay. And investors often demand a higher yield to compensate for the possibility of prepayment.

As noted above, a Mortgage-backed Security (MBS) is a debt security that is collateralized by a mortgage or a collection of mortgages. An MBS is an asset-backed security that enables investors to profit from the mortgage business without the need to directly buy or sell home loans. Lenders may issue their own MBS, or sell the loans to aggregators who do that, or sell loans to Freddie Mac or Fannie Mae, or securitize FHA & VA loans through the Ginnie Mae program.

MBS often end up with insurance companies or pension funds. When an investor buys a mortgage-backed security, it is essentially lending money to home buyers. In return, the investor gets the rights to the value of the mortgage, including interest and principal payments made by the borrower. Lenders selling the mortgages they hold enable banks to lend mortgages to their customers with less concern over whether the borrower will be able to repay the loan. The bank acts as the middleman between MBS investors and home buyers. Who is servicing the loan matters, especially during times of refinancing.

Ginnie, Fannie, and Freddie? As a response to the Great Depression of the 1930s, the government established the Federal Housing Administration (FHA) to help in the rehabilitation and construction of residential houses. The agency assisted in developing and standardizing the fixed-rate mortgage and popularizing its usage. In 1938, the government created Fannie Mae, a government-sponsored agency, to buy the FHA-insured mortgages. Fannie Mae was later split into Fannie Mae and Ginnie Mae to support the FHA-insured mortgages, Veterans Administration, and Farmers Home Administration-insured mortgages. In 1970, the government created another agency, Freddie Mac, to perform similar functions to those performed by Fannie Mae.

Freddie and Fannie charge gfees. Why? They guarantee timely payments of principal and interest on these mortgage-backed securities. Even if the original borrowers fail to make timely payments, both institutions still make payments to their investors. Know that the government does not guarantee Freddie Mac and Fannie Mae. If they default, the government is not obligated to come to their rescue. However, the federal government does provide a guarantee to Ginnie Mae. Unlike the other two agencies, Ginnie Mae does not purchase MBS. Thus, it comes with the lowest risk among the three agencies.

Does that help?

On the first day after the divorce was final, he sadly packed his belongings into boxes, crates, and suitcases.

On the second day, he had the movers come and collect his things.

On the third day, he sat down for the last time at their beautiful dining room table. By candlelight, he put on some soft background music, and feasted on a pound of shrimp, a jar of caviar, and a bottle of spring-water.

When he’d finished, he went into each and every room and deposited a few half-eaten shrimps dipped in caviar into the hollow center of the curtain rods.

He then cleaned up the kitchen and left.

On the fourth day, the wife came back with her new boyfriend, and at first all was bliss.

Then, slowly, the house began to smell. They tried everything; cleaning, mopping, and airing-out the place.

Vents were checked for dead rodents, and carpets were steam cleaned.

Air fresheners were hung everywhere. Exterminators were brought in to set off gas canisters, during which time the two had to move out for a few days, and in the end, they even paid to replace the expensive wool carpeting. Nothing worked! People stopped coming over to visit.

Repairmen refused to work in the house. The maid quit.

Finally, they couldn’t take the stench any longer, and decided they had to move, but a month later – even though they’d cut their price in half – they couldn’t find a buyer for such a stinky house.

Word got out, and eventually even the local estate agents refused to return their calls.

Finally, unable to wait any longer for a purchaser, they had to borrow a huge sum of money from the bank to purchase a new place.

Then the ex called the woman and asked how things were going. She told him the saga of the rotting house. He listened politely and said he missed his old home terribly and would be willing to reduce his divorce settlement in exchange for having the house.

Knowing he could have no idea how bad the smell really was, she agreed on a price only 1/10th of what the house had been worth. But only if he would sign the papers that very day.

He agreed, and within two hours her lawyers delivered the completed paperwork.

A week later the woman and her boyfriend stood smiling as they watched the moving company pack everything to take to their new home, and… to spite the ex-husband, they even took the curtain rods!

I love a happy ending, don’t you?

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. STRATMOR’s current blog is titled, “Adjusting Loan Officer Compensation to Improve Profitability.” The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).


(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is for sophisticated mortgage professionals only. There are no paid endorsements by me. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2024 Chrisman LLC. All rights reserved. Occasional paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman.)


Rob Chrisman