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Piggybankblog posted on 10/02/12
Cross linked with finance.fortune.cnn.com
FORTUNE –The Federal Reserve’s recent decision to buy mortgage bonds until the economy recovers has made home lending more attractive than it has been in years. The spread between what it costs to fund a mortgage loan and what borrowers actually pay is nearly three times as large as usual. So it’s perhaps no surprise that one of the first firms to rush into this profit-filled fun house is headed by the former executives of the most notorious subprime lender of the era that led to the financial crisis.
Last month, PennyMac (PMT), a finance company run almost entirely by alumni of Countrywide Financial, opened its first retail branch. The company expects to hire as many as 100 employees for the office, which is in Pasadena, California, including loan officers and underwriters.
To head the office, PennyMac has tapped Stephen Brandt, who, according to a Congressional report released in July, ran Countrywide’s “Friends of Angelo” program. The report found that Brandt’s former unit handed out hundreds of sweetheart loans to members of Congress, their staffs and other government employees. One of the main thrusts of the division, according to the report, which was nicknamed after Countrywide’s former CEO, Angelo Mozilo, was to soften anti-predatory lending laws.
“There’s free money on the table and you don’t have to work that hard to get it, especially if you are the former executives of Countrywide,” says Michael Widner, an analyst who covers PennyMac at brokerage firm Stifel Nicolaus. “You’ve done this before.”
PennyMac has been around for a couple of years. But when it was started in 2008 by a dozen former executives of Countrywide, including Stanford Kurland, who was Countrywide’s No. 2 executive before leaving in 2006, PennyMac’s stated business plan was to buy up delinquent mortgage loans on the cheap, offer modifications and make some money in the process.
In the past year, though, PennyMac has morphed into something that more resembles Countrywide. In recent investor presentations, Kurland and other PennyMac executives have talked up the company’s unit that finances new mortgage loans made by outside brokers and small banks. The unit was launched a year ago, and now accounts for about a third of the company’s profits.
PennyMac has been more tight-lipped about its direct lending operation, which is still relatively small. A number of analysts who follow the company were unaware of it. PennyMac spokesman Kevin Chamberlain, and Countrywide alumni, says PennyMac’s retail operation is focused on refinancing delinquent borrowers whose mortgages have been acquired by PennyMac into affordable loans. He says the Pasadena office is not for walk-ins. Chamberlain says the firm has no plans to make subprime loans.
What’s more, Chamberlain says direct lending is not a part of PennyMac’s investor presentations because the division is part of the company’s private operations, not its publicly traded company. On Brandt, Chamberlain says the executive oversaw 700 to 800 employees at Countrywide, including “one to three employees whose partial responsibility was to take loans for the VIP unit.”
PennyMac, though, doesn’t seem to be hiding its lending operations from potential customers. The company is using direct mail to solicit customers. The company’s website advertises new home loans with rates as low as 3.5%, and has an 800-number to call. The person who answers says he works for PennyMac.
PennyMac’s odd corporate structure has worried some Wall Street analysts. PennyMac runs a public mortgage REIT, but not all of the company’s business and profits go to the REIT. For instance, PennyMac’s mortgage REIT is not approved to sell loans to Ginnie Mae, which is the government entity that backs FHA loans. So when PennyMac finances those loans – $1.6 billion in July and August alone – the public REIT passes them along to a private division of the company, which is owned and operated by PennyMac’s executives and its two outside investors, asset manager Blackrock and private equity firm Highfields Capital. The REIT makes a small fee, just 0.03%, on those deals and the private entity pockets the rest, which is the bulk of the profits.
“Kurland definitely has aspirations to grow the company into something that is substantial and in the end will probably look something like Countrywide,” says Widner, who rates PennyMac a hold. “But with the stock what you are getting is a subdivision of the company.”
To meet those aspirations, Kurland has recruited many of the same executives who helped him build Countrywide into a mortgage behemoth. Of the 313 PennyMac executives who are listed on professional networking site LinkedIn, 75 had spent some time at Countrywide. Along with Kurland, PennyMac’s chief operating officer, chief financial officer and chief credit officer all hail from Countrywide, as do the firm’s head of marketing, head of consumer lending and head of human resources.
So far it appears to be working. PennyMac has funded over $9 billion in mortgages this year, up from less than $1 billion in 2011. Executives say they hope to be on pace to finance $30 billion in mortgage loans next year. That would make the PennyMac the 12th largest mortgage lender in the country, according to trade publication Inside Mortgage Finance. Still, that would be a fraction of what Countrywide was, which at its height financed about $500 billion in home loans a year, and regularly ranked as the nation’s largest mortgage lender.
A recent analysis by the Wall Street Journal found that Countrywide has cost Bank of America, which acquired the giant mortgage lender in 2008, nearly $40 billion in additional costs since the deal was completed, much of it due to subprime and other high-risk loans that Countrywide made at the height of the housing bubble that have since gone bad.
In December, Bank of America agreed to pay $335 million to settle charges that Countrywide loan officers regularly charged minority borrowers higher rates and fees than those paid by similar white borrowers. In the past year, a number of former Countrywide employees have come forward to say they tried to warn regulators about abusive or lax lending practices at the firm but were either silenced by their superiors, or fired.
None of the executives at PennyMac are directly linked to any of the alleged wrongdoing at Countrywide. Unlike Mozilo and other high-ranking Countrywide executives, Kurland was not charged with fraud by the Securities and Exchange Commission. Kurland has been sued by former shareholders of Countrywide, but PennyMac spokesman Chamberlain says Kurland left Countrywide before much of the practices alleged in the suits occurred.
Either way, PennyMac’s current investors don’t seem to be bothered by Kurland and his team’s past, or by the company’s complicated structure. Shares of the REIT have risen nearly 50% in the past year. It doesn’t hurt that PennyMac has a 9.3% dividend yield at a time when investment income is hard to come by.
More surprising is the reaction PennyMac gets from consumer advocates. John Taylor, who heads the National Community Reinvestment Coalition and has been a frequent critic of subprime lenders, welcomes the firm. He says mortgage rates have stayed frustratingly high, and that there is a huge number of borrowers who are still having trouble refinancing. Taylor thinks PennyMac and firms like it could help.
“These are not the type of people I want to have over my house for dinner,” says Taylor. “But competition is good.”
- PennyMac fraud Outlined at www.Elainegalindo.com
- PennyMac! Countrywide! Executives! Where are they Now?
My name is John Wright AND I AM FIGHTING BACK!
All Rise! The Honorable Judge Wright has left The Courtroom of Public Opinion!
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