Why Citigroup Inc’s Patience Is a Virtue, but Terrible for PennyMac Mortgage Investment Trust

WhatCitigroup (NYSE: C  ) is a massive global bank which, following the financial crisis, had a ton of distressed assets it was determined to sell. So determined, in fact, the company was willing to part with the loans at a fairly sizable discount to principal value.

PennyMac Mortgage Investment Trust  (NYSE: PMT  )  is a mortgage REIT that invests in distressed assets. More specifically, nonperforming loans which it acquires from banks and other financial institutions.

Match made in heaven, right?

Citigroup gets to derisk its balance sheet and release capital, and PennyMac Mortgage gets a discount on its bread and butter investment. Also, by using the company's "high tough" approach, PennyMac Mortgage can restructure mortgages to help keep borrowers from defaulting -- while earning a nice chunk of change in the process. 

The two companies' needs matched up so perfectly, from 2012 to 2013 PennyMac Mortgage acquired nearly $1 billion in distressed assets from Citigroup. 

So what: According to statements made by Citigroup's CEO Michael Corbat on Thursday, the fire sale is over. 

With the mortgage market improving, albeit slowly, and Citigroup's overall business in better shape, Corbat is in no rush dump the remaining $71 billion in nonperforming loans inside of Citi Holdings (a compilation non-core assets the company has been selling off).

Corbat suggested if the company receives offers "anyplace close to what we think those mortgages are worth, and we're happy to sell them." However, Citigroup is "not going to sell them at a distressed price."

A fact PennyMac Mortgage is all too aware of, considering the company didn't purchase any loans from Citigroup in the first quarter of 2014. This is compared to more than $200 million in the first quarter of 2013. 

Now what: Moving forward, Corbat made it clear the company will attempt to "maximize capital" by being patient with the remaining assets inside of Citi Holdings. This includes subsidiary and sub-prime mortgage lender OneMain Financial. Which Corbat noted is a great business, but doesn't fit within the company's core-business model, and will be spun off given the right scenario. 

Ultimately, Citigroup shareholders should be pleased. First of all, that the company is in a position to be patient, and secondly, holding out for the best offer demonstrates the CEO's commitment to creating a stronger long-term return for shareholders.

The outlook for PennyMac Mortgage isn't quite as attractive. Approximately 50% of the company's assets are investments in nonperforming loans. So, if the distressed asset well is drying up and prices on loans increase, it could have a significantly negative impact on the company's profitability. 

While the company is attempting to strengthen is correspondent lending (pooling mortgages and selling them into the secondary market) channels, the overall opportunity doesn't appear quite as appealing as it once did.

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Dave Koppenheffer

Dave Koppenheffer, is a contributor for the Motley Fool's financial sector. And much like Dwayne "The Rock" Johnson, when he speaks, he speaks with an earnest vibe and an earnest energy.

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9/4/2015 4:00 PM
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PennyMac Mortgage… CAPS Rating: ****