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PennyMac mortgage fund falls for a second day after IPO

July 31, 2009 |  4:30 pm

How an initial public stock offering is not supposed to go: Investors buy at $20 a share and two days later the market price is $18.80 -- an immediate 6% haircut.

That’s been the fate of Calabasas-based PennyMac Mortgage Investment Trust, a real estate investment trust set up by former Countrywide Financial Corp. executives to buy and restructure troubled home loans.

PennyMac sold 16 million shares at $20 each in its IPO late Wednesday. The stock slumped to $19.10 when it began trading on Thursday and fell further on Friday, ending at $18.80.

Penmac As I noted in this earlier post, PennyMac is controversial because of the people behind it, led by former Countrywide President Stanford Kurland.

But putting that aside, the IPO looks like it was botched by the underwriters. PennyMac had hoped to sell 20 million shares at $20 each, raising $400 million. But the final deal was cut to 16 million shares at $20 a piece.

Given the 20% reduction in the number of shares offered, investors who might have been interested in buying once the stock began trading instead saw no reason to jump in, realizing that there wouldn’t be any significant pent-up demand. So the share price was under immediate pressure.

PennyMac also suffered from being in a crowded field: There is a long line of similar funds hoping to go public in the next few months to target distressed mortgages that may be salvageable. PennyMac’s IPO investors may have figured there was an advantage to being in one of the first funds out the door. But other potential investors may have skipped PennyMac because they’re hoping for better deals.

Suddenly, "There are a lot of ways for institutional investors to play" the troubled-mortgage market, said Bose George, an analyst who follows mortgage REITs for brokerage Keefe Bruyette & Woods Inc.

He also noted that PennyMac refused to back off from its plans to charge a hedge-fund-like incentive fee on the assets it manages, in addition to normal management fees.

"Almost every REIT that has tried incentive fees has had to pull it" because of investors’ objections, George said.

For PennyMac and other new mortgage funds one key issue is whether there will be enough of a supply of distressed loans to go around in the short run. The loans are out there, on lenders’ books. The question is whether the lenders will be willing to part with them at prices discounted deeply enough to make them profitable workout candidates for funds like PennyMac.

-- Tom Petruno

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