Ex-Countrywide Executives: Helping Reduce REO Properties
June 2nd, 2009 by 
Joseph Smith
A company, run by former executives of Countrywide Financial, will try to clean up the housing mess which the lender helped create by purchasing and modifying loans to reduce the number of REO properties.
Countrywide Financial became a contributor in the housing market crisis when it issued risky mortgage loans to many homeowners who, in the end, could not afford them which led to foreclosures.
The crisis cost Countrywide Financial Chief Executive Officer Angelo Mozilo his position in the company which was acquired by the Bank of America last year.
But Stanford Kurland, who worked as chief operating officer and chief financial officer under Mozilo at Countrywide, together with other executives established PennyMac which will operate by purchasing troubled mortgage loans that have been piling up to alleviate the foreclosure crisis.
PennyMac announced that it plans to raise about $750 million in an initial public offering. Under its filings with the U.S. Securities and Exchange Commission (SEC), PennyMac will start its operation by purchasing distressed loans and modifying them.
Since the value of mortgage loans took a dive, financial institutions were forced to make massive write-downs. These losses have caused banks to streamline their lending operations which severely affected the country’s economy.
Once PennyMac acquired and owns the loans, it will approach distressed homeowners with an offer to modify these mortgages to make them affordable. Modifying may mean reducing interest rates or the loan principal.
The company will purchase distressed loans at big discounts. It will earn profits when a loan has been modified provided that the homeowner remains current on his reworked loan. In the event that the credit market makes a recovery and loan values increase, Pennymac will try to sell these mortgages.
For example, PennyMac could purchase a troubled mortgage from a failed bank for about 20 centavos on the dollar, which is well below the 70 centavos that the bank had on its portfolio. PennyMac will then contact the delinquent owners of the loans and offer to reduce their mortgage payments by about 50 percent. This will reduce the value of the trouble loans by 35 centavos on the dollar.
Its SEC filings stated that the company plans to purchase troubled loans from failed banks, insurance and mortgage companies. It also plans to take advantage of a government program that will use federal funds to help finance acquisition of distressed assets.
Some industry experts hope that PennyMac will be able to make a difference in the effort to curb the number of REO properties by stopping loan defaults and foreclosures.
