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Shifting From Vulture Fund To Mortgage Conduit

Stan Kurland, the former Countrywide president who hoped to make a killing by purchasing distressed mortgage assets at bargain prices, is facing a cold reality that's thrown a monkey wrench into his strategy: banks and Wall Street firms aren't selling.

The financial garage sale of the century - with an anticipated $1 trillion in trash changing hands - is a bust or as Penny Mac notes in a recent public filing: "Through its interactions in the marketplace, our manager [a unit of the company] has observed that during our initial period of operations, relatively few holders of distressed mortgage loans have offered these loans for sale." In other words, Penny Mac's entire reason for being has (for now) turned out to be a bad idea - even though in its IPO filing and "road show" to institutional investors Mr. Kurland and other company executives were talking like it was the Gold Rush of 1849. The sky was the limit. Well, maybe not. Mr. Kurland and his team, which includes several former Countrywide executives, hoped to raise $700 million when it went public in August. It appears that even though the potential to make a killing in nonperforming loans is there, investors were queasy. The publicly traded REIT raised just $300 million - during a bull market.

To date, Penny Mac has bought just one portfolio of size, a $558 million pool of loans from the FDIC, which it paid just $226 million for. That's it. Meanwhile, Penny Mac isn't talking to the press these days, this columnist included. It recently pulled its profile from YahooFinance.com so if you want to take a quick look at who its top executives are and what they earn you're out of luck unless you have an account with the SEC's EdgarOnline system. (Luckily, I do.)

So, what's its game plan? Let's go to the SEC filing. It still believes there are opportunities in distressed mortgages, but its first quarter as a publicly traded company was less than stellar. It lost just under $1 million. And now it has a new idea. It wants to be a mortgage banker. Huh? Mr. Kurland wants to re-enter the lending arena by having Penny Mac start a conduit. Why? I guess it's obvious. The firm isn't making it as a vulture fund (and specialty servicer) but it sees an opportunity acting a middleman between the GSEs and what it calls "smaller mortgage lenders."

It plans to find (presumably) nonbanks that are ineligible to become Fannie Mae, Freddie Mac and GNMA seller/servicers, buy their loans and securitize them using the government eagle. It also believes that in time the private-label market might come back and that its conduit (which is being organized as I write this) would be in the catbird seat should such a revival occur. Then again, maybe Mr. Kurland isn't familiar with Sen. Chris Dodd's bill to have nongovernment MBS issuers retain 10% of the risk.

The question that investors in Penny Mac should ask themselves is this: Mr. Kurland, you weren't quite right about the vulture fund thing, why should we believe you now? But perhaps I'm being too tough. Penny Mac is right about one thing - mortgage bankers need liquidity. No doubt about it, but can Mr. Kurland's young firm make it happen? It has $324 million of assets on its books, and presumably a cadre of banks willing to lend it money even though its share price recently fell to a new low of $16.70. (Its high is $20.) I know one thing about its future that's not mentioned in its SEC filing: if its bankers stop lending them money all bets are off.

Paul Muolo can be e-mailed at Paul.Muolo@SourceMedia.com.