As Don King would say "Only in America"

March 4, 2009
Ex-Leaders at Countrywide Start Firm to Buy Bad Loans
By ERIC LIPTON

CALABASAS, Calif. — Whether they deserve to be or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering.

So it may come as a surprise that a dozen top Countrywide executives now stand to make millions from the home mortgage mess.

Stanford L. Kurland, Countrywide’s former president, and his team of former company executives have been buying up delinquent home mortgages that the government took over from other failed banks, sometimes for pennies on the dollar. They get a piece of what they can collect.

“It has been very successful — very strong,” John Lawrence, the company’s head of loan servicing, told Mr. Kurland one morning last week in a glass-walled boardroom here at PennyMac’s spacious headquarters, opened last year in the same Los Angeles suburb where Countrywide once flourished.

“In fact, it’s off-the-charts good,” he told Mr. Kurland, who was leaning back comfortably in his white leather boardroom chair, even as the financial markets in New York were plunging.

As hundreds of billions of dollars flow from Washington to jump-start the nation’s staggering banks, automakers and other industries, a new economy is emerging of businesses that hope to make money from the various government programs that make up the largest economic rescue in history.

They include contractors who are supplementing the labor of overworked government bureaucrats, big investors who are buying up failed banks taken over by the federal government and lobbyists helping businesses receive a chunk of the bailout money. And there is PennyMac, led by Mr. Kurland, 56, once the soft-spoken No. 2 to Angelo T. Mozilo, the perpetually tanned former chief executive of Countrywide and the firm’s public face.

Mr. Kurland has raised hundreds of millions of dollars from big players like BlackRock, the investment manager, to finance his start-up. Having sold off close to $200 million in stock before leaving Countrywide, Mr. Kurland has also put up some of his own cash.

To Mr. Kurland and his colleagues, PennyMac’s operations serve as a model for how the federal government, working with the nation’s banks, can help stabilize the housing market and lead the nation out of the worst recession in decades. “It is very important to the entire team here to be part of a solution,” Mr. Kurland said, standing in his office, which has views of the nearby Santa Monica Mountains.

It is quite evident that their efforts — and the nascent government program to encourage other private investors to work with lenders — are, in fact, helping many distressed homeowners.

“Literally, their assistance saved my family’s home,” said Robert Robinson, of Felton, Pa., whose interest rate was cut by more than half, making his mortgage affordable again, even though he recently lost his job.

But to some, it is distressing turn of events to see the Countrywide team, led by Mr. Kurland, in the business again.

“It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it,” said Margo Saunders, a lawyer with the National Consumer Law Center, which for more than a decade has sought to place limits on abusive lending practices.

More than any other major lending institution, Countrywide has become synonymous with the excesses that led to the housing bubble. The once-highflying firm’s reputation has been so tarnished that Bank of America, which bought it last year at a bargain price, announced that Countrywide’s name and logo, which had once proudly announced the biggest mortgage lender in the United States, would soon disappear forever.

Mr. Kurland acknowledges pushing Countrywide into the type of higher-risk loans that have since, in large numbers, gone into default. But he said that during his tenure, he always insisted that the loans went only to borrowers who could afford to repay them. He also said that Countrywide’s riskiest lending took place after he left the company, in late 2006, after what he said was an internal conflict with Mr. Mozilo and other executives, whom he blames for loosening loan standards.

In retrospect, Mr. Kurland said, he regrets what happened at Countrywide and in the mortgage industry nationwide, but does not believe he deserves blame.

“It is horrible what transpired in the industry,” said Mr. Kurland, who has never been subject to any regulatory actions.

But lawsuits against Countrywide raise questions about Mr. Kurland’s portrayal of his role. They accuse him of being at the center of a culture shift at Countrywide that started in 2003, as the company popularized a type of loan that often came with low “teaser” interest rates and that, for some, became unaffordable when the low rate expired.

The lawsuits, including one filed by New York State’s Comptroller, say Mr. Kurland was well aware of the risks, and even misled Countrywide’s investors about the precariousness of the company’s portfolio, which grew to $463 billion in loans, from $62 billion, during the final six years of his tenure.

“Kurland is seeking to capitalize on a situation that was a product of his own creation,” said Blair A. Nicholas, a lawyer representing retired Arkansas teachers who are also suing Mr. Kurland and other former Countrywide executives. “It is tragic and ironic. But then again, greed is a growth industry.”

David K. Willingham, a lawyer representing Mr. Kurland in several of these suits, said the allegations related to Mr. Kurland were without merit, and motions have already been filed to seek their dismissal.

Federal banking officials — without mentioning Mr. Kurland by name — added that just because an executive worked at an institution like Countrywide did not mean he was to blame for questionable lending practices. They said that it was important that they did business with experienced mortgage operators like Mr. Kurland, who knew how to work with borrowers creatively to renegotiate their delinquent loans.

PennyMac was born last spring after Mr. Kurland received a phone call from a childhood friend, Lawrence Fink, now the chief executive of BlackRock, which along with other investment groups is trying to figure out how to profit from the decline by buying up distressed loans at fire-sale prices. Mr. Fink lured him back in business, and BlackRock invested.

PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from Highfields Capital, a hedge fund based in Boston. Other investors include Atlantic Philanthropies, based in Bermuda and created by the billionaire former owner DFS Group, a chain of airport duty free shops.

PennyMac makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously, even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.

Its biggest deal has been with the Federal Deposit Insurance Corporation, which it paid $43.2 million, or the equivalent of 38 cents on the dollar, 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.

Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect from borrowers, with the federal government receiving the rest. Eventually that will rise to 40 cents.

Telephone operators at PennyMac’s offices — working in shifts — spend 15 hours a day trying to reach borrowers whose loans the company now controls. In many cases, they offer drastic cuts in the interest rate or other deals, which PennyMac can afford, given that it paid so little for the loans.

PennyMac hopes to achieve a profit of at least 20 percent annually, and it is actively courting other investors in an effort to build its portfolio, which now consists of $800 million in loans, to as much as $15 billion in the next 18 months, executives said. For the borrowers whose loans have ended up with PennyMac, it can translate into an extraordinary deal.

The Laverde family of Porter Ranch, Calif., had fallen three months behind on its mortgage after sales at a furniture store owned by the family dipped in the economic crisis. Margarita Laverde and her husband were fearful that they might need to move their four children, four dogs and giant saltwater aquarium, among other household items, into a cramped apartment, leaving behind their dream home — a five-bedroom ranch on a quiet suburban street overlooking the San Fernando valley.

But a PennyMac representative instead offered to cut the interest rate on their $590,000 loan to 3 percent, from 7.25 percent, reducing their monthly payments nearly in half, Ms. Laverde said.

“I kept on asking, ‘Are you sure this is correct? Are you sure?’ ” Ms. Laverde said. Even with this reduction, PennyMac stands to make a profit of at least 50 percent, a company official said.

Ms. Laverde could not care less that executives at PennyMac used to work at Countrywide.

“What matters,” she said, “is that we know our house is secure and our credit is safe.”

 

Yes, in most other countries this work would be handed out to the friends and donors of the political leaders in power. Give Obama time. We'll get there.

 

So the banks sell these morgages to the Countrywide ex employee very cheap. So is the only reason the bank did not negotiate lower interest for the people of default/forclosure themself , but are willing to sold them cheap to Kurland, because the bank will have a big amount of money right away from Kurland and investors? And with the FICA deal, they get money right away AND 52 cents for every dollar the Kurland man recovers?
So this will give the banks more capital, what they need.
They said in that article that it was unfair for Kurland to profit from a mess he made, and profit again with his new business.
But that is not different than how Goldman sachs made a profit from selling swaps, and selling CDO, and then profit again by selling ABX index?