Housing is hot and Moorpark mortgage lender PennyMac Financial Services Inc. jumped headlong into the market in May with an initial public offering that raised $200 million. But just in case anyone believes distressed mortgage debt is yesterday’s news, consider this: in the last year, sister company PennyMac Mortgage Investment Trust has spent more than $1 billion to buy underperforming mortgages more than 90 days delinquent or in default. “We’re on par to exceed that this year,” said Kevin Chamberlain, spokesman for both companies. “The market for underperforming loans … is good.” Indeed, the trust reported $53 million in profits from investments in distressed debt in the first quarter, about as much as it recorded all of last year. What’s more, the two companies, both headed by former Countrywide President Stanford Kurland, went on an acquisition spree in June, jointly purchasing a large portfolio of delinquent loans from Citigroup Inc. for an undisclosed price. And analysts say there is still plenty of business to be had as the housing market recovers. “We believe (PennyMac Mortage Investment Trust) will be a direct beneficiary of the reformation occurring in the residential mortgage market,” said Daniel Furtado, an analyst in the San Francisco office of equities firm Jefferies & Co., in a note. The two companies are separate, but intertwined. The trust’s large portfolios of mostly distressed assets are managed for a fee by the financial services company. The financial services company not only services the trust’s loans, but also makes and manages consumer loans, as well as managing the mortgage assets of several private equity firms. Each company is overseen by its own board of directors, but the trust is externally managed by the financial services company, while key executives are shared, including Kurland. In a conference call with investors in May, Kurland said he believes the two firms’ relationship will protect both companies should the economy nosedive again. One is an investment company, the other a service firm. “(PennyMac Mortgage Investment Trust’s) multiple investment strategy provided a strong first quarter for 2013 and we are well-positioned to capitalize on opportunities as the market transitions toward normalization,” he said. Expansion plan There has been criticism that Countrywide executives are profiting off of a situation they created when at the helm of the subprime mortgage giant, which collapsed in bankruptcy before being sold to Bank of America. But it doesn’t seem as though investors care. Perhaps more troubling, though, is Kurland’s financial ties to the two companies. He owns 11.6 percent of the financial services company and roughly 2 percent of the trust. At a conference this month, Andrew Chang, chief business development officer for the real estate investment trust, addressed the issue. Chang called the marketplace buzz about Kurland’s loyalties “poorly informed” and told the crowd “we believe that (the trust) has in place the proper agreements, controls and oversight to mitigate potential conflicts in its relationship with (the other company).” Those controls include separate boards at each company and a committee formed to oversee activities related to both companies. Chamberlain, the spokesman for both companies, said Kurland’s investments make sense, noting that the trust functions as a real estate investment trust that must disgorge most of its profits to shareholders. “The financial services company is a growth company,” he said. “The trust is not a growth company, it’s a dividend company.” The financial services company is expanding its correspondent lending division, which originates and packages loans for sale to other banks. It is even opening a new office in Sacramento to help build that portion of the business. In late June, the firm disclosed that it has signed a five-year lease on a 26,384 square-foot office space in Sacramento and plans on opening an office staffed with 200 additional employees. Stock questions In fact, PennyMac has risen to be one of the 10 largest mortgage lenders in the country, according to trade publication MortgageStats. And while the big money is still in distressed debt, at least for the short term, analysts say the financial services arm is the future. “The biggest risk factor with (PennyMac Financial Services) is the margin on correspondent lending falling to the point where it slows the growth of this business. We do not see this happening at this point,” said Henry Coffey Jr., a senior analyst at Birmingham, Ala. equity firm Sterne Agee Group Inc. in a recent note. Investors seem to agree. While the trust, which has been a big money maker, saw stocks hit an all-time high of $28.27 on Jan. 18, it’s been downhill since, though it’s recovered a bit. Meanwhile, shares of the financial services company have risen since its initial offering. The service company does not have retail branches, but operates phone centers through which it manages its direct lending operations. The company has made many loans through its affiliation with the federal government’s Home Affordable Refinance Program, set up in 2009 to help homeowners underwater on their mortgages. It has also grown its direct loan business with credit-worthy applicants. “We take a look at the loans and work with them to modify,” said Chamberlain. “And that’s how we make profits off these under
Dollars Printed By PennyMac
