“Stanford L. 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.”
Ex-Leaders of Countrywide Profit From Bad Loans [New York Times]

18 thoughts on “JustQuotes: Profiting From (Their Own) Poor Underwriting Skills”
  1. They made money on the way up, and now on the way down. Very smart. The government should be the one doing this, just to try to recoup some of the losses for the taxpayer. But, 1 – they have no clue on how to do this and 2 – do they really care?

  2. So, they burned down the house and now profiting by selling the charred salvage. How come nobody is going to jail for arson?

  3. I don’t see any problem with this at all. These guys know the value of the underlying mortgage pools better than anyone (since they wrote many of them) so they’re spotting underpriced opportunities and taking advantage of them. Leon Black made billions doing the same thing in the early 90s. He sold the world overpriced junk while at Drexel then made a real fortune buying it up at steep discounts from the ruined companies that overpaid in the first place. Smart guys that recognized opportunities on both ends.

  4. Lose? They paid 3.8 cents on a dollar. They only have to collect more than $3800 on $100k ninja loan they wrote in order to make a profit. It’s a windfall if there was one.

  5. They are actually limited in how much money they can make off of the loans they buy from FDIC and according to an article they have already made a bunch of money. Current portfolio is about 800MM and they plan to expand that to $15Billion in two years and make at least 20% per year going forward. Not bad.
    One could argue that this business model demonstrates a major flaw in mark to market accounting rules. Why should a bank have to mark down RMBS to a level based on fire-sale prices when these securities are obviously worth more than that- so much more that some people are going to make a killing buying them cheap, modifying the loans (or foreclosing and reselling), and flipping them.
    Anyone looking for a truly good deal on a house should find out what properties are in the loan portfolios these guys are buying for 4 cents on the dollar and offer to take over one of the distressed mortgages for 12 cents on the dollar. They triple their money and you pay one-eight the previous value for the house.

  6. “PennyMac’s payment was the equivalent of 38 cents on the dollar, according to the full terms of the agreement.
    Under the initial terms of the F.D.I.C. deal, PennyMac is entitled to keep 20 cents on every dollar it can collect [presumably after the 38 cents is paid back], with the government receiving the rest. Eventually that will rise to 40 cents.”
    Where on earth do you get 3.8 cents? They paid 38 cents for a bunch of delinquent loans and they only get a fraction of the recovery. Most factors (the guys who buy receivables) wouldn’t touch that deal. The recovery split goes up inversely proportional to the chance of recovery: the longer it takes, the less chance they’ll see anything.
    Sounds like a very tough deal to be very profitable on. They write off 1/3 of the loan amount, so they take a 20% split of something south of 1/3, or about 6%-8 of the ones they can recover, and probably half of those are a lost cause because the LTV is still underwater for the homeowner. The deal was in Nevada, where prices are hit the hardest. If the homeowner walks, they can foreclose and sell it for maybe 50%, or 12% more than the 38 cents they paid. And they’ll get less than half of that – about 5% of the total. A lot of the ones they can get people to start paying on will probably end up in foreclosure again by next year.

  7. I think the really cheap loans they are buying are not from FDIC but directly from banks and others. There was a story about this on NPR (I think) that indicated that some of the portfolios are worth almost nothing.

  8. Also, what does “equivalent” of 38 cents on the dollar mean? $43million paid for $562million of loans looks more like 8 cents on the dollar to me. .

  9. “Anyone looking for a truly good deal on a house should find out what properties are in the loan portfolios these guys are buying for 4 cents on the dollar and”
    This is easier said than done tho. For one thing, if they can banks like to sell in bulk. That’s one way Penny Mac and similar, older companies have always gotten over. It’s pretty tough for an individual consumer to even get the right person on the phone.

  10. Trip – good analogy with the infamous Drexel Burnham Lambert. Leon Black made a fortune cleaning up the scams that Drexel ran – OK, sometimes the guilty get away. But at least at Drexel, some of the bad guys paid a high price – Milken, Ivan Boesky and Dennis Levine all went to prison. Joseph was banned from Wall Street. The firm was broken up in disgrace. Giuliani made a name for himself. No govt bailout or taxpayer money was needed.
    Why can’t we use RICO again and send the tan man and some other Wall Street crooks to prison? (Wouldn’t you love to see Robert Rubin in Milken’s old cell?) The criminal courts and shareholder lawsuits got us some measure of justice with Enron and Worldcon. Bernie Ebbers is doing a life sentence, Skilling and Fastow did some hard time, and Key Lay was sentenced to an early grave – surely their crimes were no greater than those committed by many at AIG, Fannie and Freddie, and most of the Wall Street banks.
    Kurland and his new PennyMac scheme may make some money for himself and the taxpayer. Great – I’m not sure the simple 20-80 split is in our best interests – but best of luck to him. Looks like he may be dragged into some shareholder suits. Maybe he’s a good guy who just happened to bail out at the right time (in 2006 with $200M in Countrywide stock).

  11. “They are actually limited in how much money they can make off of the loans they buy from FDIC and according to an article they have already made a bunch of money.”
    Since no private entity is going to pay more for these loans than they think they are worth the maximal value is returned to the taxpayer if the loans are held on the FDIC’s books and allowed to run out.
    Thus this is just another example of free government cheese for connected insiders.

  12. one quick thing:
    don’t forget the true genius of this plan. For the most part, Mr, Kurland is still playing with other people’s money.
    it is debatable how well his investment strategy will work… I’m not as 100% sure as others that this is a sure thing.
    however, what IS a sure thing is Mr. Kurland’s fees…
    he’ll win either way, whether or not his portfolio is worth anything.

  13. One could argue that this business model demonstrates a major flaw in mark to market accounting rules. Why should a bank have to mark down RMBS to a level based on fire-sale prices when these securities are obviously worth more than that- so much more that some people are going to make a killing buying them cheap, modifying the loans (or foreclosing and reselling), and flipping them.
    Hold on a second.
    FIRST OF ALL: I have NOT researched what Penny Mac is really doing here. so my comments may be in error.
    however, please understand that the mark to market accounting situation is complex.
    it is not typical for banks to use mark to market accounting for their loans held in portfolio. They use mark to market for their securities. (Like RMBS)
    It is unclear if Penny Mac is buying the loans or the securities. It appears BY BRIEFLY READING the article that they are buying the loans (not the securities)
    if that is true, then mark to market has nothing to do with this and the banks are not marking these loans to market.
    (the banks are using other accounting techniques for poorly performing loans held in their portfolio).
    Those in the banking sector are trying to use Mark To Market accounting as a punching bag, pretending it’s causing all sorts of problems, when in fact that is not necessarily the case.
    My GUESS would be that the securities sold to Penny Mac by these banks did not use Mark To Market accounting.

  14. “Where on earth do you get 3.8 cents?”
    OK, make that 8 cents on the face value. I thought I computed 3.8 cents when I first looked at it a couple days ago. These are the securities traded at 25 cents on the open market. Do you think these guys will pay above the market value? And only keep 20 cents of recovery? Not a chance.
    I don’t know where NYT got 38 cents. Perhaps 38 cents on a FDIC’s dollar, which means it costed the FDIC 21 cents on a face value dollar.

  15. ex SF-er, FASB 157 mark-to-market requirements apply only to “financial instruments that trade in an active market held by a broker-dealer or investment company” and to derivatives (from Statement 133) – so loans held in a bank’s portfolio wouldn’t be affected. I agree with you that the impact of the rule seems to be greatly overblown by many (like Steve Forbes). Sure, maybe it should be modified – but it’s just accounting. Analysts have always drilled down through accounting conventions (and maybe in this case the “market” is giving the correct indication).
    If PennyMac is dealing with just unsecuritized loans, shouldn’t it be easier to determine their performance and pricing? I suspect deimos is right that some rats are getting a big chunk of govt cheese.

  16. ex SF-er, FASB 157 mark-to-market requirements apply only to “financial instruments that trade in an active market held by a broker-dealer or investment company”
    Yes, I know. That was my point above.
    Loans in a portfolio use accrual accounting.
    I was just stating that I’m not sure what Penny Mac is doing because I didn’t analyze the deal… just skimmed the NYT article. (economic reporters often get their facts wrong).
    If PennyMac is dealing with just unsecuritized loans, shouldn’t it be easier to determine their performance and pricing?
    Yes. and in fact we’ve already done this (by having the bank sell it to Penny Mac!)
    I suspect deimos is right that some rats are getting a big chunk of govt cheese.
    This is probably true. However, there still IS risk to Penny Mac’s investors. we still have no idea how far the downturn will go and how low recovery of these assets can drop.
    So they may buy a loan portfolio on 8 cents on the dollar… but if they only bring in 4 cents on the dollar they lose money.
    Again, NOT HAVING ANALYZED THIS DEAL, I hesitate to say this is government cheese being porked over to Penny Mac… although it does appear highly possible.
    we do need to encourage private investment in these deals to start elucidating a clearing price for the various secrutiies (loans, securities, etc).
    That said, given the previous history of Penny Mac’s executives there is a certain perceived impropriety here, whether deserved or not. (I think deserved).
    lastly: I still maintain that the worst part of the story is that using OTHER PEOPLE’S MONEY is still the modus operandi.

Leave a Reply

Your email address will not be published. Required fields are marked *