Wednesday, July 29, 2009

I Would Buy PennyMac, Just Not at the IPO

PennyMac Mortgage Investment Trust ("PMT") will begin trading tomorrow with in a 20 million share IPO priced about $20 per share.

I am very bullish on the mortgage REIT sector these days. Below you will find an article from Bloomberg explaining PMT and how these REITs have risen phoenix-like from the ashes of market destruction.

The fundamentals of this sector are extremely strong. Record low interest rates, lots of so-called "toxic" paper to buy (which in reality is more like gold than sludge), and substantial talent in the industry looking for jobs, just like Stanford Kurland.

I'd buy PMT and the others after their IPO hype has died down. These vehicles have a long way back to respectability so there is no rush to jump in if you plan on holding them long term.

Robert J. Abalos, Esq.

Countrywide Alumni Seek Profits From Housing Collapse

By Elizabeth Stanton

July 29 (Bloomberg) -- PennyMac Mortgage Investment Trust, which plans to raise $400 million in a stock offering today, is betting that the people who helped create the housing crisis will know how to profit from the cleanup.

Chief Executive Officer Stanford L. Kurland, 57, was president and chief operating officer of Countrywide Financial Corp., the loan originator whose co-founder, Angelo Mozilo, was sued by the Securities and Exchange Commission. Ten other senior officials also worked at Countrywide, whose subprime loans have suffered from a 39 percent delinquency rate, according to data compiled by Bloomberg. PennyMac hopes to make money buying mortgages from failed banks and redoing the terms.

“People who are critical of Wall Street will find with justification things to criticize here,” said Stanley Nabi, who oversees $7.5 billion as vice chairman of Silvercrest Asset Management Group in New York. “They’re going to say, ‘Look, these are the people who created this crisis, and now they’re buying this paper on the cheap.’”

PennyMac operates in a growing market. More than 1.5 million properties received a default notice or were seized in the U.S. during the first six months of 2009, a record, according to RealtyTrac Inc., which sells mortgage data. Backed by BlackRock Inc. and Highfields Capital Management LP, PennyMac plans to charge fees similar to those at hedge funds as it tries to rehabilitate loans.

SEC Lawsuit

Rising default rates at Countrywide drove its shares down 91 percent through March 2008, prompting a sale to Bank of America Corp., based in Charlotte, North Carolina. Mozilo, who co-founded Countrywide in 1969, was sued in June by the SEC for allegedly hiding the company’s deteriorating finances.

Kurland quit Countrywide in September 2006, ending a 27- year career with the largest U.S. mortgage lender. Once considered Mozilo’s likely successor, Kurland was replaced by David Sambol, one of two top Countrywide executives who the SEC sued along with Mozilo. No one at PennyMac was a target of the lawsuit.

Ray Johnson, a spokeswoman at PennyMac, declined to comment, citing regulatory restrictions prior to initial public offerings. The company cut the size of the deal, scheduled for completion after the close of trading today, from $750 million on July 16 when it announced plans to sell shares for $20 each. They will trade under the “PMT” stock symbol.

Failing Banks

The real-estate investment trust says it will buy loans from lenders who failed as well as mortgage companies and insurers. In January, it purchased $558 million of mortgages that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada failed.

The collapse of the U.S. mortgage market has caused more than $1.5 trillion in losses at financial institutions worldwide and prompted the FDIC to close 64 U.S. banks this year, the most since 1992.

PennyMac’s investments may return 15 percent to 25 percent a year, said Evan Gentry, the founder and chief executive officer of G8 Capital, a private buyer of distressed loans and real estate based in Ladera Ranch, California. Two of Gentry’s funds use a similar strategy.

“New mortgage REITs look more desirable than at any time I can remember,” said Dean Frankel, a money manager at Urdang Securities Management who met with PennyMac officials on July 22 to discuss the offering. Urdang, a unit of Bank of New York Mellon Corp. in Plymouth Meeting, Pennsylvania, manages $1.5 billion of real-estate investments. “While we don’t generally invest in mortgage REITs, we are taking a hard look,” he said.

Property Stocks Fall

A Bloomberg index of mortgage REITs plunged 76 percent in 2007 and 2008 and fell 23 percent this year through March 5. It then surged 36 percent, trailing the gain in the Standard & Poor’s 500 Index by more than 6 percentage points.

PennyMac executives plan to charge a management fee equal to 1.5 percent of shareholders’ equity plus an incentive fee that’s one-fifth of profits above a certain level. It would be the first REIT since 2007 to succeed in charging an incentive fee, which are standard among hedge funds. While American Bethesda, Maryland-based Capital Agency Corp. and Cypress Sharpridge Investments Inc. of New York tried to, they scrapped those provisions prior to their IPOs in May 2008 and June 2009, respectively.

Pending Deals

At least six other mortgage-related IPOs are pending, five of which also aim to collect incentive fees. New York-based Sutherland Asset Management Corp. amended its prospectus yesterday to remove one.

Investors may agree with PennyMac that its connection with Countrywide is an asset, said Matthew Howlett, who analyzes real-estate securities at Fox-Pitt Kelton Inc. in New York. PennyMac’s offices in Calabasas, California, are less than five miles from Countrywide’s.

“They understand the reasons a lot of these borrowers ended up defaulting,” he said. “They’re uniquely positioned to identify and correct them, and that can be enormously profitable in this environment given the prices.”

PennyMac’s strategy may rely too heavily on the assumption that investor appetite for mortgage-related assets will recover, said Terry Wakefield. He is a consultant to the residential loan industry who helped design Fannie Mae’s mortgage-backed securities business in 1981 and later traded the derivatives at Salomon Brothers Inc.

High default rates on restructured loans may also deter investors, Wakefield said. About 53 percent of mortgages modified in the first quarter of 2008 were 30 or more days delinquent after six months, and 63 percent were in default after a year, according to a June 30 report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

“The big issue in PennyMac’s world is: Where are they going to sell those loans, assuming they’ve been effectively modified?” Wakefield said. “I don’t know a lot of people standing in line to buy those assets.”