There are about a million different ideas out there on how to solve, and profit from, the housing meltdown. Here's the newest.
The FDIC cut a first-of-its-kind deal to sell a portfolio of bad residential mortgages from a failed bank to a private equity group, while still maintaining an interest in those loans. The $558 million loan package came from First National Bank of Nevada, which the FDIC took over in July.
The loans were sold to Private National Mortgage Acceptance Company, or PennyMac, for somewhere between 30 and 50 cents on the dollar. That's quite a discount. But what's new here is that the FDIC did this in a "structured sale" that keeps the feds in the mix. The FDIC will share in any potential new losses from these loans, OR in any potential gains.
PennyMac, backed by BlackRock and Highfields Capital, launched last year to buy distressed loans on the cheap, then rework them so homeowners can stay in their homes. The firm has bought three loan portfolios so far, with mortgages worth about $800 million but CEO Stan Kurland says, "We have a lot more capital to invest." Sellers could include other FDIC-controlled bank failures, or lenders who don't have the time, energy, and expertise to modify bad mortgages.
But the key is to buy these loans at the right price. In the case of First National Bank of Nevada, say you're a homeowner with a $500,000 loan from that bank which you've stopped paying. Maybe the house is only worth $300,000 now. PennyMac just bought that loan for somewhere around $200,000. That gives PennyMac a lot of room to aggressively modify the loan so you'll start paying again. This keeps you in your home, and PennyMac's investors make money.
PennyMac had hoped to close the fund to new money at the end of December, but that didn't happen, as the market meltdown last fall dried up new investments. So it's not too late to get in, though individual investors need at least $1 million to start.
But the firm has raised some eyebrows.
Most of the executive team came from Countrywide, now owned by Bank of America . Kurland worked there for 27 years, rising to the number two position, before leaving in 2006 (there are reports of tension between him and co-founder Angelo Mozilo). Some have wondered if these Countrywide alums are now profiting from a mess Countrywide helped create. "I don't like to spend a lot of time going through the history," Kurland tells me, adding, "I left Countrywide in 2006, and much of the things that you're criticizing, or that people criticize, occurred quite a ways after I left." He blames the housing meltdown on a "perfect storm" which included mistakes by direct lenders, ratings agencies, GSE's, the Fed lowering interest rates, an over reliance on FICO scores, and on the mistaken belief that home prices would keep going up.
Still, as for criticism of his team, Kurland says to make PennyMac work, "The only people that can do this are people that come out of the mortgage industry...it's much different than just investing in securities. You actually need to have expertise in all the activities that go from sourcing mortgage pools to modeling, evaluating, due diligence, servicing, (and) modifying mortgages."
However, PennyMac expects some of the loans it's buying will redefault, even after being modified. Kurland tells me his biggest challenge is to get homeowners interested in paying their mortgages again, that some have just lost interest in their homes. Default expectations range from 20 to 90 percent on various loans. I asked Kurland why he would buy a loan with a 90 percent chance of defaulting? "It's part of the pricing, obviously," he replies. "To be able to buy the loans at a discount gives us the ability to work aggressively with borrowers in terms of reducing their payments."
What kind of prices does he expect to pay for distressed loans during 2009? "I think that they'll continue to range from 30 cents on the dollar to as high as 80 to 85 cents on the dollar."
Posted here are three tape clips of my exclusive interview with PennyMac CEO Stan Kurland.
In the first clip, he gives some details of the new deal with the FDIC for the First National Bank of Nevada mortgages.
In the second clip, Kurland responds to questions about whether he and other former Countrywide executives are now benefiting from the mess Countrywide helped create.
Finally, the last clip is his outlook for the housing industry and his investment in distressed loans.