PennyMac May Lose $7MM

Calabasas, CA-PennyMac, the mortgage vulture fund founded by a former top executive at Countrywide Financial Corp., is sitting on top of unrealized losses of $7 million, according to documents filed with the Securities and Exchange Commission.

In its filing, PennyMac states that its PNMAC Mortgage Opportunity Fund has invested $152.9 million and those assets were recently valued at $145.8 million.

The filing, a form N-Q, does not provide much detail but notes, "The inputs or methodology used for valuing securities are not an indication of the risk associated with investing in those securities." At press time a company spokesman had not returned a telephone call about the matter.

With money provided by Black Rock Financial, PennyMac was launched by former CFC president Stanford Kurland about 18 months ago. Mr. Kurland's firm, Highfields Capital, is an investor as well.

The vulture fund hopes to raise up to $750 million through an initial public offering. In January the fund bought a $558 million portfolio of 2,800 residential loans from the Federal Deposit Insurance Corp. The deal was completed using a cash flow sharing arrangement with the government.

PennyMac's goal on the FDIC portfolio is to service and work out the loans. PennyMac has bought at least two other portfolios but, to date, has disclosed little about its investments.

In regard to the FDIC portfolio, the government agency will receive 80% of the cash flow on the loans with the balance going to the investor group. Eventually the FDIC will receive 60% of the cash flow. "Once it hits a certain threshold it adjusts downward," an FDIC spokesman explained to this publication earlier in the year.

The portfolio consists of outstanding first and second liens scattered throughout the U.S. with the heaviest concentration in Arizona, California, Florida and New York.

As a technical matter, an investment fund managed by a PennyMac affiliate (PNMAC Capital Management LLC) bought the loans from the FDIC, paying cash for them. The portfolio belonged to First National Bank of Reno, which failed a year ago.

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