PennyMac, Mortgage-Servicing Hero
I’m heartened by the content of Eric Lipton’s NYT story on PennyMac, even as I’m disappointed in its tone. PennyMac is a company set up by former Countrywide executives — people who understand the mortgages which are souring around the nation. It is dedicated to buying up and servicing those mortgages in the most effective manner: reducing interest rates, working with borrowers, and not foreclosing.
One of the biggest problems in the mortgage industry right now is the lack of intelligent servicers: far too many of them are overworked and underqualified, and careen towards foreclosure even when it benefits no one. PennyMac is clearly not one of those servicers: it makes its money from homeowners’ renegotiated mortgage payments, not from distressed foreclosure sales. It’s exactly the kind of company this country needs more of right now.
So why has the NYT decided to run the story under the headline "Ex-Leaders of Countrywide Profit From Bad Loans"? Why does it quote one person comparing them to an arsonist (albeit a very curious type of arsonist who "buys up charred remains") and another saying that what PennyMac is doing is "tragic"?
The answer is that one of the downsides to being a distressed-debt investor is that you will always get vilified. (See vulture funds, passim.) It’s very unfortunate, because these investors are a necessary part of any resolution to the current mortgage mess. We need private money to come in, provide a bid for distressed assets, and work intelligently to put homeowners on a sustainable footing. It’s the kind of thing which is far more useful than filing lawsuits against lenders, as PennyMac’s critics are wont to do. And yet the consumer advocates have no interest in dirtying their hands in such matters, and seem to be very happy sniping from the sidelines when someone like PennyMac starts doing something useful on a for-profit basis.
And the NYT only serves to confuse matters with reporting like this:
Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million for $560 million worth of mostly delinquent residential loans left over after the failure last year of the First National Bank of Nevada. Many of these loans resemble the kind that Countrywide once offered, with interest rates that can suddenly balloon. PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect, with the government receiving the rest. Eventually that will rise to 40 cents.
None of this is easy to understand. For one thing, PennyMac didn’t pay $43.2 million for the loans — if it had done, then it would have been paying less than 8 cents on the dollar, not 38 cents. Instead, PennyMac paid $43 million for the right to receive 20% of the income from the loans, rising to 40% when the income passes a certain level. If you use that datapoint to mark the loan portfolio to market, perhaps the value of the loans can be pegged at 38 cents on the dollar. But the point is that PennyMac is no passive bond-market investor: instead it’s investing a lot of its own time and effort in this mortgage portfolio, with its phone banks working 15 hours a day to try to come to an agreement with individual homeowners.
In an ideal world, the homeowners in question would be reaching out to their servicers, asking for a renegotiation of their loans. In practice, however, people who are behind on their mortgage tend to be scared and suspicious of anybody from the mortgage company: they often avoid phone calls, and adopt an adversarial stance. Working constructively with these people is not always easy. I’m happy that PennyMac is putting real resources into doing just that.
Reprinted from Portfolio.com