The growing mound of nonperforming mortgages led Stanford Kurland, the former Countrywide Financial Corp. executive, to start Private National Mortgage Acceptance Co. (PennyMac) last March to buy and service distressed loans.
But the expected flood of loan sales did not materialize.
"No one was selling and investors were sidelined," Kurland, the chairman and chief executive of the company known as PennyMac, said in an interview Wednesday. Banks were reluctant to sell, he said, because they would have to take losses, which "would exacerbate their capital issues."
Then in October sellers were distracted by the opportunity to sell assets into the government's Troubled Asset Relief Program (TARP), Kurland said. Initially the Treasury Department said it would use the $700 billion Congress had authorized for the program to buy distressed assets; it then shifted toward making equity investments in financial institutions.
Tarp, in its original iteration, further discouraged sales of bad loans, according to Kurland.
"Everybody who wanted to, and could sell, did not as they expected, thinking the Tarp would save them," he said.
But he said sales are picking up, in part because shaky institutions are selling themselves at fire-sale prices.
"Some of the acquirers, banks that have purchased or merged with these weaker banks," will "sell off parts of these pools because the acquirers aren't set up to deal with troubled mortgage assets," he said.
The Federal Deposit Insurance Corp. (FDIC) is also expected to become a big seller as it markets portfolios inherited from failed banks.
In fact this week the Calabasas, Calif., company announced its third and largest purchase since its founding: a $558 million portfolio the FDIC picked up from First National Bank of Nevada, which closed in July. The deal was structured like a joint venture, with PennyMac and the FDIC sharing in the cash flow and any upside if delinquent loans are brought back to performing status.
Kurland said he is "looking for more transactions and working on more transactions, but it's a very long process."
He said PennyMac beat out at least four other bidders for the First National Bank of Nevada portfolio, and that the sale, which Stifel, Nicolaus & Co. Inc. marketed, took several months to complete.
"I'm working a lot harder than I thought," he said.
PennyMac's portfolio now totals about $800 million. Kurland would not say how big the company aims to become. (It has the backing of two major investors: BlackRock and Highfields Capital Management.)
Kurland resigned as Countrywide's president and chief operating officer in October 2006 after 28 years with the lender. Last year Countrywide was sold to Bank of America Corp.
He described a paradox in the housing market, where values have plummeted to 2003-2004 levels.
"Just at the time that lenders and investors should be more comfortable with less equity, the markets are requiring more equity," he said. "It's much more appropriate to be making a 95% [loan-to-value] loan where you have solid value of a property than in 2006, and yet it's become more and more restrictive."
One area of concern is that Federal Housing Administration (FHA) programs to bring first-time homebuyers into the market "are more restrictive and less flexible" than the ones Fannie Mae and Freddie Mac used to offer.
"As people become more convinced that values are solid, and home values have stopped dropping, these [FHA] lending programs will start to reflect that," Kurland said.
On Thursday Fannie and Freddie said they had extended, to the end of January, a suspension of foreclosures and evictions that was scheduled to expire today. The government-sponsored enterprises said they wanted to give servicers more time to adopt a streamlined modification program that began last month.
Mr. Kurland said that if Fannie and Freddie can act early and modify "loans that have imminent issues" so they do not end up in foreclosure, it would go a long way toward stabilizing the market. "That's a big part of the market."
Because it purchases whole loans, rather than securitized ones, PennyMac has been able to avoid the problems that have led to litigation against servicers from investors that object to modifying loans or giving any principal discounts to defaulted borrowers.
"No one has cracked the code" on private-label securitizations, Kurland said.
Loans purchased from failed banks present other challenges.
"The loans are stressed to begin with," Kurland said. "On top of that you have servicing disruptions and a period of inactivity where the prior owner, the failed bank, is no longer approaching" borrowers who have fallen behind, because the bank is focused on staying in business. Receivership can slow things down further, he said.
PennyMac "will go after the loans aggressively" once it has them, he said.
One issue that has riled Mr. Kurland and other servicers is the foreclosure moratoriums by several states. Another scratch-and-debt purchaser, who requested anonymity, said prices for loans in judicial foreclosure states have dropped to 45 cents on the dollar from 60 cents because buyers must factor in longer foreclosure times.
Kurland said that while a small percentage of borrowers "want to game the system," far more are willing to work with their lender.
"Moratoriums aren't helpful, because they confuse people about their obligation," he said. "Rather than people being encouraged to work with their lender and to modify and refinance their mortgage, they are getting mixed messages that the repercussions aren't going to be as severe if they don't cooperate."