Ex-Countrywide president launches troubled-mortgage fund
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Stanford Kurland, once president of Countrywide Financial Corp., this week plans to take his newest venture public: a fund that will buy up troubled mortgage loans.
The irony won’t be lost on the investors Kurland is trying to attract to his PennyMac Mortgage Investment Trust, a real estate investment trust. An architect of the subprime mortgage boom, Kurland, 57, now is looking to profit by cleaning up the mess left by Countrywide and other disgraced lenders.
His investors presumably will buy into the trust precisely because of Kurland’s three decades in the mortgage business, not in spite of it. PennyMac’s goal is to acquire distressed loans on the cheap, then modify them to keep the borrowers in their homes while still earning a hefty return on the debt.
The prospectus for the stock offering says the Calabasas-based fund expects to ‘provide attractive risk-adjusted returns to our investors over the long-term, primarily through dividends and secondarily through capital appreciation.’ In the roadshow for the offering the firm says it believes its business model is capable of generating 18% to 25% annualized returns on mortgage portfolios, before management fees.
But, of course, that’s hypothetical. As with any new venture, investors buying the PennyMac trust will have to be long on hope and faith.
The trust hopes to raise $400 million this week by selling 20 million shares at $20 each via lead underwriters Merrill Lynch, Credit Suisse and Deutsche Bank Securities. The shares will trade on the New York Stock Exchange under the ticker symbol PMT.
Kurland, who was Angelo Mozilo‘s No. 2 man at Countrywide, left in September 2006 -- a year before the company began to crumble under the weight of rising loan losses. He founded Private National Mortgage Acceptance Co. early in 2008 with a team of other ex-Countrywide execs specifically to begin buying up troubled home loans.
Understandably, the move triggered attacks from consumer advocates who have likened Kurland to an arsonist who burns down someone’s house and buys up what’s left to resell.
Yet right away, two Wall Street giants signed up to partner with Kurland: bond fund titan BlackRock Inc. and private equity firm Highfields Capital Management.
The first phase of the business was raising money from private investors to fund mortgage purchases. Kurland’s company now owns and/or services loans totaling about $800 million and soon expected to grow to $2.8 billion. With the PennyMac trust Kurland is inviting the public to join him in a separate portfolio to be managed, for fees, by Kurland and his partners (who also will be shareholders).
In the prospectus for the offering and the roadshow presentation, PennyMac stresses that its process evaluates distressed loans one by one to decide on a solution -- either a modification, foreclosure or resale of the loan. That custom approach, the firm says, is what sets it apart from many lenders struggling just to deal with the avalanche of troubled borrowers and unused to being creative with modifications.
The custom approach to loan workouts is what the Obama administration and regulators have been hoping to get from banks, but lenders’ progress in modifying mortgages has been dismal to date.
Kurland, with his private funds and with the PennyMac trust, is hoping to take on much more loan volume over time. In the PennyMac prospectus the firm estimates that of the $4 trillion in mortgages now held by banks, about $1 trillion ‘are troubled or at significant risk of default in their present state.’
Though consumer advocates may be repulsed by Kurland’s venture, the federal government has had a different response: The Federal Deposit Insurance Corp. late last year struck a deal for Kurland’s private funds to take over the mortgage portfolio of the failed First National Bank of Nevada.
-- Tom Petruno