Ex-Countrywide team back in loan business

CALABASAS, Calif. — Fairly 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 former top Countrywide executives now stand to make millions from the home-mortgage mess.

Stanford Kurland, Countrywide's former president, and his team 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 Kurland one recent morning in a glass-walled boardroom here at the spacious headquarters of PennyMac, whose full legal name is the Private National Mortgage Acceptance Co. The offices opened last year in the same Los Angeles suburb where Countrywide once flourished.

"In fact, it's off-the-charts good," he told Kurland, who was leaning back in his leather boardroom chair even as the financial markets in New York were plunging.

As hundreds of billions of dollars flow from Washington, D.C., 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 Kurland, 56, once the soft-spoken No. 2 to Angelo Mozilo, the former chief executive of Countrywide and the firm's public face.

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

While some critics are distressed that Kurland and his team are back in business, the executives say that 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.

Help for homeowners

It is evident 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 disturbing to see Kurland and his former Countrywide executives in the industry 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 Margot Saunders, a lawyer with the National Consumer Law Center, which for more than a decade has sought to place limits on what it calls abusive lending practices by Countrywide and other companies.

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 both the name and logo of Countrywide, once the biggest mortgage lender in the U.S., would soon disappear.

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 insisted loans go 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 Mozilo and other executives, whom he blames for loosening loan standards.

But lawsuits accuse Kurland 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 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, three times faster than the market nationwide, in the last six years of his tenure.

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

Federal banking officials — without mentioning 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 to do business with experienced mortgage operators like Kurland, who know how to work with borrowers creatively to renegotiate their delinquent loans.

How it makes money

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 Corp., 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 terms of the FDIC 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 spend 15 hours a day trying to reach borrowers whose loans the company now controls.

In dozens of cases, after it has control of loans, it moves to initiate foreclosure proceedings, or to urge the owners to sell the house if the owners do not respond to calls, are not willing to start paying again or plainly cannot afford the house. In many cases, the operators offer drastic cuts in the interest rate, 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 courting other investors 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.