PennyMac Branches Out With Origination Division

41
PennyMac’s Stanford Kurland

Private National Mortgage Acceptance Co. isn’t afraid of change.

The Calabasas company, better known as PennyMac, was founded two years ago to invest in cheap distressed mortgages being offloaded by struggling lenders. More recently, with the secondary market coming back, the company has started buying new prime loans to securitize.

But its latest evolution might be its most significant going forward: originating mortgages.

PennyMac, started by former Countrywide Financial Corp. Chief Operating Officer Stanford Kurland, has formed a division that will originate prime loans for borrowers, which executives expect to be fully operational as early as the end of the year.

Already, the company was named the preferred lender overseeing a financing program for buyers at the highly touted CityCenter development that opened in December in Las Vegas. Through the program, PennyMac was tasked with originating and servicing fixed and variable-rate loans, which it plans to securitize and resell through the secondary market.

“We’ve spent the good part of this entire year building the infrastructure for the new loan conduit activity,” Kurland said. “We have within the current management and employee base significant levels of expertise in origination and servicing activities.”

Over the past few years, Los Angeles has lost scores of mortgage lenders through a severe industry contraction. But while many companies have gone out of business or laid off staff, PennyMac has experienced a growth spurt. The company has roughly doubled its work force over the past year to 200 and has attracted significant investor capital.

PennyMac launched in March 2008 with backing from asset manager BlackRock Inc. and hedge fund Highfields Capital Management, seeking to buy discounted whole loan portfolios from failed and operating banks. Last year, PennyMac raised $335 million when it went public. It said last month in a regulatory filing that it may seek to raise as much as $500 million more.

Derided as a bottom-feeder by critics – who also note Kurland is trying to profit from the very loans originated by his former employer – PennyMac hasn’t exactly set the world on fire. The company has acquired several loan portfolios, but admitted in an early regulatory filing that “relatively few holders of distressed mortgage loans have offered those loans for sale.” Still, after losing $1.8 million during its 2009 operation, the company has reported profit of more than $9 million in the first six months of this year.

At the same time, though, signs that the housing market may be near the bottom have raised questions about the viability of PennyMac’s business.

Michael Widner, an analyst at St. Louis-based Stifel Nicolaus & Co. who follows PennyMac, said the company’s original business model – namely, profiting from distress – has a finite life cycle that ceases to become viable when the market turns around. For that reason, he believes that PennyMac is wise to expand its business into other areas that could be sustainable in a better economic environment, including origination and securitization.

“It certainly makes a lot of sense for PennyMac to develop the capabilities to do all those things that will come back roughly at the same time that its core business starts diminishing,” Widner said.

PennyMac’s conduit originations business is still small. One executive estimated that fewer than a dozen of the company’s employees handle originations. Kurland said the company offers primarily conventional mortgages today, but hopes to get into jumbo loans when the market comes back.

Originations are not exactly new territory for many of PennyMac’s employees. Besides Kurland, nearly a dozen executives came from Countrywide, which had been the nation’s largest independent mortgage lender before the housing bust.

Kurland said the evolution of the business away from distressed mortgage activities was intentional.

“That’s always been the plan for PennyMac: to deal with the opportunity in distress and converge to the revitalized mortgage market as a fully functional platform,” he said.

NEW LENDER

Private National Mortgage Acceptance Co.

Calabasas

Top Local Executive: Stanford Kurland

Focus: Prime loans