A year and a half after stepping down from the No. 2 executive post at Countrywide Financial Corp., Stanford L. Kurland is returning to the industry in a role that underscores how much things have changed since: running a buyer and servicer of distressed mortgages.
There have been numerous attempts to work out large numbers of bad loans in this cycle — some by institutions seeking to stanch losses, and others by hedge funds and other bottom-fishing investors seeking to profit from the activity. Mr. Kurland said he expected his new venture, Private National Mortgage Acceptance Co. LLC, or PennyMac, to fare better, because it is taking a different approach.
"The programs and methodologies that were appropriate in the past are not appropriate now. It needs something different," he said.
That "something different" involves buying whole loans, Mr. Kurland said. He said PennyMac will not be subject to the restrictions that servicers of securitized mortgages face, and unlike banks, it can modify loans without fear of taking a hit to regulatory capital.
In an interview, Mr. Kurland shared thoughts on the roots of the mortgage crisis and the road to recovery. He also talked just a bit about his Countrywide days.
The meltdown resulted from a "confluence of events," Mr. Kurland said. Like many observers, he laid some of the blame on the Federal Reserve Board for cutting interest rates too quickly. But he also said lenders did not use "a common sense approach" and put too much confidence in artificial intelligence systems that underestimated the frequency and severity of delinquencies and foreclosures.
"There was a lot of validation for a period of time that the models were working," he said. "The confidence put behind these models resulted in more liberalized underwriting criteria, and you put that all together, and you have a credit problem compounded with an asset problem."
One of the reasons bankers have been slow to adapt to the crisis is that they must report paper losses on loans in their held-for-sale portfolios, Mr. Kurland said. If a loan is modified, it is reclassified as nonperforming and bleeds into reserves, putting stress on regulatory capital. At PennyMac, "we don't have the issues that a traditional bank has where you have an aggressive program for a segment of your portfolio, and everybody else has to live up to existing terms."
And unlike servicers hamstrung by Wall Street pooling and servicing agreements, "we're focused on whole loans, and once we acquire them, we have total flexibility, which is what will create value for our investors," he said. "Foreclosing on borrowers and liquidating their homes and going into fire sales is really the worst … for everybody."
Instead of doing that, "what is so important to revitalizing the market is to deal with the overhang and bringing new capital — patient capital — to the market," Mr. Kurland said.
PennyMac has the backing of the fixed-income money management powerhouse BlackRock Inc. and the Boston investment firm Highfields Capital Management LP. The venture will modify and restructure mortgage debt by focusing primarily on "the borrower's ability to pay and their willingness to pay," he said. "That willingness changes."
It also plans to "provide incentives for the borrower to pay and reestablish their equity in a property," Mr. Kurland said. "Part of that has to do with how we employ the discount in how we're buying mortgages. That's the most important thing the market has to face."
Last week the billionaire investor Wilbur Ross announced a deal to buy the servicing operations of Option One Mortgage Corp., which was founded in 1992. But Mr. Kurland said PennyMac plans to build its servicing operations from scratch, so they are not plagued by "legacy issues." (Last year the Greenwich, Conn., hedge fund Carrington Capital Management LLC bought the servicing operations of the bankrupt New Century Financial Corp. of Irvine, Calif., which was founded in 1995 but started the servicing arm in 2002.)
PennyMac is based in Calabasas, Calif., also the headquarters city of Countrywide, and Mr. Kurland said there are plenty of talented mortgage professionals available. Nine other Countrywide veterans have joined PennyMac's management team.
He said he has paid little attention to the turmoil at Countrywide, even though he was viewed for years as the heir apparent to Angelo Mozilo, its chairman and chief executive. "At some point, our strategic views diverged, and I left, and I really didn't keep track of what they did or how they responded to the market after I left," Mr. Kurland said. "I don't think anybody could have actually said that the environment would be like this or as bad as it is," he said. "Looking back, you can see a lot of things that should have changed more quickly."
