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PennyMac rises from Countrywide's collapse to help pick up pieces

NEW YORK — Countrywide Financial placed itself at the epicenter of the housing crisis by making far too many risky loans to homeowners who ultimately couldn't afford them.

Those missteps cost CEO Angelo Mozilo his job when the lender was taken over by Bank of America a year ago at a fire sale price.

Mozilo is now spending most of his time dealing with the dozens of lawsuits naming him as a defendant, but his onetime No. 2 executive and a team of Countrywide alumni are still in the game — shopping around a new business called PennyMac that buys up distressed mortgages and modifies borrowers' loans.

So, the same people who helped create the housing mess are now trying to make money cleaning it up. As off-putting as that sounds, there's a certain logic to it.

"What will be important to watch here is whether PennyMac has found a way to make money and can do good for home­owners at the same time," said Margot Saunders, an expert on predatory lending through her work at the National Consumer Law Center.

PennyMac announced May 22 that it wants to raise $750 million in a public stock offering. No date for the IPO has been set, and the company declined any comment relating to its business because Securities and Exchange Commission rules prohibit it from going beyond what is spelled out in the IPO disclosure document.

The game plan discussed in the SEC filing starts with PennyMac buying at a deep discount troubled loans that have been clogging the books of the nation's banks. Financial institutions already have been forced to take massive writedowns since the value of those assets have plunged. Those losses have caused banks to drastically curb lending, which has hurt the overall economy.

Once PennyMac owns the loans, it plans to approach borrowers with offers to modify the mortgages to make them more affordable. That could mean lowering the principal on the loans or cutting interest rates.

PennyMac could buy a mortgage from failed Bank ABC for 20 cents on the dollar, well below the 70 cents Bank ABC had it on its books.

PennyMac then contacts the delinquent homeowner and offers to cut his mortgage payments in half, which would bring the value of the loan down to 35 cents on the dollar.

PennyMac profits from the spread between where it bought the loan and modified value. In this case, that would be 15 cents on the dollar.

While its business model has promise, the company's leaders still have a lot to prove. That's because 11 of the 14 PennyMac officers are from Countrywide, once the nation's largest mortgage lender. It got that way in part by pioneering the origination of subprime loans to borrowers with risky credit.

That turned out to be a flawed strategy because it was predicated on rising housing prices leaving an escape hatch for borrowers to sell their homes for a profit if they couldn't afford their mortgage payments. That didn't happen, as we now know, and subprime borrowers increasingly defaulted on their loans as home prices tumbled. Countrywide's lending practices have made it a target of numerous investigations and lawsuits.

PennyMac founder and CEO Stanford Kurland was a 27-year veteran of Countrywide and worked his way up to chief financial officer and chief operating officer under Mozilo. Kurland got out before the company's collapse, leaving in 2006 and cashing out $87 million in stock the year he departed, according to data-tracker InsiderScore.com.

"The scandals involving Countrywide show they didn't have homeowners' best interest in mind when they pushed them into subprime loans," said John Vogel, who teaches real estate finance and management at the Tuck School of Business at Dartmouth College.

That's why Kurland and others have a chance here to salvage their reputations.

PennyMac rises from Countrywide's collapse to help pick up pieces 05/30/09 [Last modified: Saturday, May 30, 2009 4:31am]
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