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The Wall Street Journal
Who Says You Can't Go Home Again?
Mortgage-Market Pros Aim to Cash In on Slump
By DIYA GULLAPALLI
March 24, 2008; Page C1
For 27 years, former Countrywide Financial Corp. President Stanford Kurland
made a fortune helping to build a mortgage-lending empire.
Now, as parts of the mortgage market collapse, Mr. Kurland and some former
colleagues have a new plan -- make another fortune on the way down.
Laurence Fink: http://tinyurl.com/28nutj
On Monday, the group will announce the launch of Private National Mortgage
Acceptance Company LLC, or PennyMac, an investment firm formed as a joint
venture between asset manager BlackRock Inc., under Chief Executive Laurence
Fink, and Boston investment firm Highfields Capital Management.
PennyMac seeks to raise more than $2 billion to buy distressed mortgages on
the cheap, work with borrowers to restructure them, and then resell them as
performing mortgages at a profit.
A number of bottom-fishers are already wading into the mortgage market, but
PennyMac is taking a different approach from most. Rather than buying slices
of mortgage-backed securities, which are claims to pools of mortgages,
PennyMac plans to buy whole mortgage loans -- the old-fashioned mortgages
that banks routinely owned before the mortgage-securitization business came
along.
PennyMac executives believe that troubles with whole loans are a big shoe to
drop for the mortgage market, with a massive unwinding steadily under way.
PennyMac executives figure that a lot of these mortgages will be sold at big
discounts as banks and thrifts clean up their balance sheets.
PennyMac will operate from Calabasas, Calif., the hometown of Countrywide,
the largest mortgage lender in the country. While the two firms aren't
related, PennyMac will be closely watched because it employs so many former
Countrywide executives. Countrywide alumnus David Spector, who until most
recently was co-head of the now-downsized global residential mortgages group
at Morgan Stanley, will be chief investment officer.
Chart:
http://s.wsj.net/public/resources/images/MI-AP620B_MORTG_20080323214414.gif
Others leading the firm are James Furash, a former chief executive of the
Countrywide Bank unit, and Michael Muir, a former chief financial officer of
the unit.
PennyMac's plan to profit from the mortgage industry's turmoil is likely to
draw fire, especially from those who believe Countrywide's aggressive sales
tactics and lowered lending standards helped lead to the subprime-mortgage
troubles in the first place.
"The whole subprime mortgage fiasco was built on sort of Wall Street's
snake-oil salesmen convincing America this is a can't-miss scheme," says Irv
Ackelsberg, a consumer lawyer in Philadelphia who testified to the Senate
Banking Committee on lending last spring. "It sounds like they've just
morphed into some new version."
PennyMac executives disagree, saying many of them were involved in risk
management while at Countrywide and its units and have little to do with the
firm's recent problems.
"I don't think it's ironic; I think it's appropriate that experienced people
are coming in" that have "the greatest capability and knowledge to
revitalize the mortgage market." says Mr. Kurland. A Countrywide spokesman
declined to comment.
In January Countrywide agreed to be sold to Bank of America Corp. for about
$4 billion.
Mr. Kurland was approached by BlackRock's Mr. Fink a few months ago about
the venture. The two have known each other since grade school in Van Nuys,
Calif. Mr. Kurland left Countrywide in 2006, where he was in line to become
chief executive after Angelo Mozilo.
The PennyMac approach could be risky, particularly if it dives in too early
and purchases loans that continue to drop in price, or if the firm can't
restructure the loans with terms that will ultimately lure buyers. This
could leave the firm holding the bag on troubled loans, ultimately leaving
its investors with losses.
"I would say the greatest risk is a very deep and very elongated recession"
without "a rebound of residential housing over a very long cycle," says Mr.
Fink. While "we don't believe" that will happen, we're also not suggesting
we know "the bubble is over or the bottom has been reached," he says.
Despite a rebound in the mortgage bond market in recent days amid major
steps by the Federal Reserve to restore confidence, PennyMac expects further
problems as $1 trillion in bank-held jumbo, subprime and other loan holdings
stand to become nonperforming. It thinks whole-loan losses have barely begun
to materialize, and a new wave of problems is coming as certain loans with
low initial "teaser" rates reset to higher rates, squeezing borrowers'
ability to pay.
Already, serious delinquency and foreclosure rates are reaching new highs by
some measures, and are likely to get worse as home prices continue to fall,
the economy slows, and unemployment rises.
Other big players are getting in the business of acquiring distressed
mortgages and restructuring them. Goldman Sachs Group Inc., for instance,
recently bought Litton Loan Servicing to help identify distressed
mortgage-loan portfolios. Back in the 1980s, Litton became successful
servicing loans in Texas that were struggling with residential real-estate
woes like today.
PennyMac considered buying one of the loan servicers, but decided most had
their hands full working with existing borrowers and growing liabilities to
mortgage investors. PennyMac will be buying mortgages in various degrees of
distress. The prices of certain second-lien debt, which stands behind others
to collect proceeds should a borrower default, have tumbled below a penny on
the dollar.
Other better-quality mortgages coveted by PennyMac trade at 80 cents to the
dollar. While PennyMac is hoping to resell some mortgages in a few months,
executives there say they can hold mortgages for years, if necessary, as it
identifies buyers.
URL for this article:
http://online.wsj.com/article/SB120632558989958655.html
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