Can folks who made millions peddling subprime loans use that same Midas touch to mint money from the housing-market downturn?
Former top executives from Countrywide Financial, once the nation's largest mortgage firm and a poster child for loose lending standards, have launched a company to buy distressed mortgages from banks and the government at a discount, modify the loans so borrowers can afford them and pocket the profits from reselling them.
PennyMac Mortgage Investment Trust -- located in Countrywide's hometown of Calabasas, Calif. -- filed papers in late May for a $750 million initial public offering on Wall Street. Its CEO and founder is Stanford Kurland, a 27-year veteran of Countrywide, who was the company's chief operating officer, president and heir apparent to CEO Angelo Mozilo. Kurland left Countrywide in 2006, days after cashing out $130 million worth of its stock. In all, 11 of PennyMac's 14 officers hail from Countrywide.
PennyMac declined an interview request because it is in the quiet period mandated by the Securities and Exchange Commission that precedes an initial public offering.
Countrywide, which agreed to sell itself to Bank of America in January 2008, was back in the news last week. Mozilo and two others -- Countrywide's former chief financial officer and a former chief operating officer -- were charged with civil fraud. All three deny it; none is involved with PennyMac.
The fact that some architects of subprime lending now hope to profit from the crisis spawned by the practice doesn't sit well with many.
"It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it," Margot Saunders of the National Consumer Law Center in Washington told The New York Times.
Times columnist Gail Collins was more graphic. "It's like Jeffrey Dahmer selling body parts to a clinic," she wrote.
Ironically, PennyMac's approach could benefit struggling homeowners, which has consumer advocates offering cautious compliments.
Most banks and investors who own mortgages still seem to find foreclosure preferable to so-called workout solutions; homeowners continue to report that their pleas for loan modifications fall on deaf ears. But PennyMac's business model is predicated on trying to keep people in their homes.
Since PennyMac plans to buy toxic loans at pennies on the dollar -- and is buying whole mortgages, not ones sliced and diced into securities owned by multiple investors -- it has the liberty to slash homeowners' monthly payments and even the principal they owe.
"PennyMac's general strategy is to keep borrowers in their homes by offering alternatives that include modification of the terms and conditions of their loans to reflect both the borrowers' current financial condition and the value of their homes," the company wrote in its Wall Street filing.
That means it wants the apple-pie result of loan modifications to make mortgages affordable -- something that banks haven't pulled off, despite months of prodding from Congress and two administrations.
PennyMac's "model suggests the great promise of an aggressive modification strategy; creating win-win opportunities for borrowers and investors," said Paul Leonard, who directs the Center for Responsible Lending's California office.
Still, he added: "These are Countrywide veterans who no doubt contributed to some of the sophisticated schemes to sell bad loans to borrowers and make great profits, who are now finding profitable ways of fixing those loans."
Another part of PennyMac's pedigree that rankles many: PennyMac has big-bucks backing from BlackRock. The giant investment manager has been tapped to help the government and banks dispose of toxic assets -- such as the mortgages PennyMac hopes to buy on the cheap. Highfields Capital, a Boston hedge fund, is another major financial backer.
PennyMac enters an increasingly crowded field of "vulture investors" seeking to capitalize on distressed mortgages. Its approach of trying to rework loans differentiates it.
Ryan Taylor is a principal at San Francisco's Cirios Real Estate, which provides data and valuations for distressed-asset funds (the polite name for vulture investors). He said PennyMac's "ability to make money is going to be pretty impressive," he said. "The key to making money in the distressed market is the servicing. The best way to do that is to start from scratch, and that's what they did. They have former loan officers dealing with distressed borrowers. ...
"They capitalized on the way up, left at the right time, and now are going to capitalize on the way down," Taylor said. "From the business person's perspective, you have to say that's pretty smart. From a moral, integrity, ethics perspective, it can be questionable."
PennyMac is structured as a real-estate investment trust, which means it gets to duck federal taxes by distributing most of its profits to investors. It is a subsidiary of Kurland's Private National Mortgage Acceptance Corp. That firm, started a year ago, had raised $584 million as of March 31, and has spent $226 million of it, according to the Wall Street filing.
PennyMac's Wall Street filing provides a revealing peek into how mortgage insiders view the market.
"We believe that there are unique, current market opportunities to acquire distressed mortgage loans and mortgage-related assets at significant discounts to their unpaid principal balances," the company wrote. "We believe that more than $1 trillion of (residential mortgage) loans are troubled or at significant risk of default in their present state."
The company's biggest deal to date was with the FDIC. It paid $43.2 million for the right to take over $560 million of distressed home loans from the failed First National Bank of Nevada. PennyMac will get to keep 20 cents of every dollar it can collect on those loans (a figure that eventually will hit 40 cents); the government gets the rest.
(E-mail Carolyn Said at csaid(at)sfchronicle.com.)
(Distributed by Scripps Howard News Service, www.scrippsnews.com.)
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