Pennymac: A Countrywide exec goes back to the housing trough

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Although Countrywide's seemingly-impressive numbers massively enriched its executives in 2005 and 2006, the mortgage lender's notoriously lax standards are often cited as a contributor to the housing boom. Stanford L. Kurland, who was the President and Chief Operating Officer at Countrywide until 2006, didn't leave his entrepreneurial streak behind when the left the company -- he is now targeting the distressed mortgage loan market by raising funds for the Private National Mortgage Acceptance Co., or "Pennymac." Pennymac is set to begin trading this week under the ticker "PMT," after it raises approximately $400 million from its IPO.

Although the IPO prospectus cites Pennymac's management as having "extensive experience in the residential mortgage business," Kurland's Countrywide connection isn't without controversy. According to SEC filings analyzed by DailyFinance, he sold over $145 million in Countrywide stock in the six months leading up to his departure from the company. Last month, the SEC brought securities fraud and insider trading charges against Countrywide executives, including CEO Angelo Mozilo and COO David Sambol, who replaced Kurland.

Pennymac's basic strategy will be to purchase bundles of mortgage loans from banks at steep discounts, after which it will work with borrowers to "address their willingness and ability to pay their mortgage loans" with tools like mortgage modifications. This, predictably, has some people angry as they wonder how an executive at a company that created so many bad loans could have the chutzpah to turn around and form a new company that is designed to profit from his earlier excesses.

As Nouriel Roubini has pointed out, Countrywide was responsible for almost 20% of mortgage originations in the country before its collapse -- and many of those were bad loans. A Standard & Poor's report from the spring of 2008, shortly before Countrywide was taken over by Bank of America (BAC), showed that delinquencies on the company's subprime mortgage portfolio were pushing 30%. That's certainly one way to create fertile hunting grounds for distressed mortgage investments.

Although there's something perverse about the entire situation, it's also worth noting that this would be a private market solution to the mortgage mess. Pennymac will play with its own money, not that of taxpayers, and re-working mortgages to lower principal balances does something crucial -- it force losses to be recognized in the financial system. Operating as a distressed mortgage purchaser grants the company more flexibility than that of a traditional bank, and Pennymac's willingness to lower principal balances could effectively increase a homebuyer's equity, leading to lower monthly payments.

A study by the Office of the Comptroller of the Currency and the Office of Thrift Supervision determined that, not surprisingly, lowering monthly payments leads to fewer re-defaults. Unfortunately, mortgage modifications generally don't work -- more than 50 percent of loans relapse within one year, and close to 60 percent do so if no changes are made to monthly payments. However, in cases where monthly payments are reduced by 20 percent or more, less than 40 percent of such loans re-default. While the Pennymac solution is far from optimal, it represents a first step toward keeping people in homes through market measures. If the lender can accomplish some good, it's hard to begrudge them a potential profit.

James Cullen edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns BAC, but has no personal position in the stocks mentioned above.

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