The Countrywide Way …
Countrywide Financial Corporation, under the leadership of Angelo Mozilo, David Loeb, Stanford Kurland and David Sambol and other able executives, was never afraid to take a calculated risk on distressed assets.
Perhaps knowing that they were more savvy than the sellers and possessed the ultimate in negotiating skills (You want to do the deal or not?), the team was able to purchase property and mortgages at pricing which often insured an instant profit the day of the purchase.
One classic story was Countrywide’s purchase of its 43-acre Simi Valley Headquarters for $16 million on favorable terms from the Resolution Trust Corporation; which was essentially an FDIC operation. With the able assistance of real estate expert Jim Travers, the deal was consummated and three weeks later Countrywide received an offer to sell the property for $20 million. Of course, the property was originally valued at $50 million when it served as the headquarters for failed Gibraltar Savings which was said to have somewhere between $6.8 and $15.3 billion in assets when it was seized by the feds.
A matter of timing …
Stanford Kurland, former President of Countrywide, left the company in 2006 for reasons only known to Angelo Mozilo and Kurland; although rumors continue to swirl that he was forced out by Mozilo who was not yet ready to retire into a “hands off” bystander when he spent 40 years of blood, sweat and tears to build Countrywide from a table top to the largest independent integrated mortgage originator in the history of the United States.
Apparently, Kurland, while not exactly destitute with what some say is hundreds of millions from his previous Countrywide service, put together a “substantially named” organization known as the Private National Mortgage Acceptance Company, LLC or more popularly called PennyMac. With funding from strategic investors and partners such as BlackRock and Highfields Capital, the company was primed to fulfill its mission.
“Private National Mortgage Acceptance Company, LLC (PNMAC) is a specialty asset management firm created to address the dislocations in the U.S. mortgage market. Through our licensed and registered subsidiaries, our focus is acquiring and managing residential mortgage assets on behalf of private investors.”
“PNMAC is bringing to the market fresh capital from long-term investors, as one step in addressing the U.S. mortgage crisis.”
“Through our licensed and registered subsidiaries, we acquire loans from financial institutions seeking to reduce their mortgage exposures. PNMAC creates value for both borrowers and investors through our distinctive approach to asset management. Our strategy is to keep borrowers in their homes by avoiding foreclosures through programs that address both their ability and willingness to pay their mortgages.”
“Our core guiding principle is to create value for investors and consumers while preserving home ownership. We support an environment of the highest standards, fostering ethical personal and business practices.”
FDIC deal …
According to Bloomberg Financial News …
“PennyMac, Led by Ex-Countrywide Head, Buys FDIC Loans”
$558 million in mortgage loans …
“Private National Mortgage Acceptance Company LLC, an investor in troubled mortgages run by a former president of Countrywide Financial Corp., bought $558 million of home loans that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada collapsed.”
Question: was the mortgage loan valuation based on the original face value of the mortgage loans, the value of the loans at the time of purchase or is this a calculated purchase price based on a valuation algorithm?
“Known as PennyMac and led by Stanford Kurland, the firm is paying an average of 30 cents to 50 cents on the dollar for the loans and the FDIC is sharing some of the risk, spokesman Andrew Chang said. He declined to provide more details beyond a statement today from the Calabasas, California-based company.”
Question: an average price is usually a single number, so why is the pricing given as a range unless it is calculated based on a recovery formula or some other valuation?
Question: In what way is the FDIC sharing some of the risk?
“First National was closed on July 25 with the FDIC named as receiver. The agency at the time estimated its deposit insurance fund would suffer an $862 million loss from closing the Nevada bank and a smaller California bank owned by the same holding company.”
Question: What is the impact of this sale on the $862 million loss to the DIF?
Second FDIC deal of 2009 …
“PennyMac’s purchase is the second FDIC sale of bank assets to private buyers announced this year. Regulators are seeking to dispose of assets after at least 25 lenders collapsed last year. With banks concentrating on rebuilding capital, the FDIC has been offering loans to private buyers, and last week sold the remains of IndyMac Bank to a group led by former Goldman Sachs Group Inc. executive Steven Mnuchin.” (see my blog entry: Finance: IndyMac Bank Sold for $13.9 BILLION OR WAS IT?)
No loss sharing?
“ ‘This asset sale did not provide any loss-sharing,’ said FDIC spokesman David Barr in an interview about the PennyMac deal. ‘It is a participation sale, however, which means the FDIC benefits from cash-flow generated from these loans.’”
“The FDIC will receive 80 percent of the loan’s cash flow until a certain, undisclosed level of payments are received, then 60 percent thereafter, he said.”
Question: Did PennyMac actually purchase these loans with cash or did they put up a token payment with the rest of the cost to be paid from recovered assets and cash flow? … With the the lack of transactional transparency obscuring the actual details?
Question: Is this what is meant by “risk sharing?” Sharing the possibility that the recovery of funds will not reach calculated estimate values?
“The loans, originated by Reno, Nevada-based First National, are made up of first and second-lien mortgages made before June 2008 with both fixed and adjustable rates, he said. The heaviest concentration of loans is in Florida, Arizona, California and New York, he said.”
Question: Were the loan tranches cherry-picked or does this purchase represent the sum total of the failed institution’s loans?
“ ‘This allows us to participate in the upside and it provides incentive for the buyers to maximize the dollar recoveries, it has advantages to both us and the buyer,’ Barr said. ‘You’ll probably see more of these.’”
Question: What incentive to maximize dollar recoveries? Any purchaser of distressed assets has a natural inclination to maximize recoveries. Will the purchaser be required to offer the borrowers the same type of loan mitigation that was attempted by Sheila Bair at IndyMac? Or will a more proprietary solution be crafted?
Question: About the pricing of the loans at 30- to 50-cents on the dollar – was this merely the purchaser’s offer or was a more rigorous valuation methodology used? At these rates, it is almost impossible to lose money on the deal unless there are a significant number of foreclosures and the underlying real estate values have dropped significantly?
Question: Is there any provision that prohibits the purchaser from simply re-securitizing these loans into derivative-type investments to be sold to other investors; with a trust structure continuing to divide cash flow between the FDIC and the investors? Does the deal account for the other cash flow synergies such as the retained servicing rights and potential pre-payment penalties on later loans?
Question: Considering the impact of the failed institution on the FDIC insurance fund, what is the most likely case scenario for a full and complete payback on fund payments to uninsured depositors; wouldn’t they have the first call on the assets to be recovered by the FDIC?
RTC – Redux?
Perhaps there is a simple explanation for the reluctance to disclose the details of the deal: it is simply an FDIC-financed equity partnership as pioneered by the RTC.
“The Resolution Trust Corporation pioneered the use of so-called ‘equity partnerships’ to help liquidate real estate and financial assets which it inherited from insolvent thrift institutions. While a number of different structures were used, all of the equity partnerships involved a private sector partner acquiring a partial interest in a pool of assets, controlling the management and sale of the assets in the pool, and making distributions to the RTC reflective of the RTC’s retained interest.”
“The RTC used equity partnerships to achieve a superior execution through maintaining upside participation in the portfolios. Prior to introducing the equity partnership program, the RTC had engaged in ‘bulk sales’ of asset portfolios. The pricing on certain types of assets often proved to be disappointing because the purchasers discounted heavily for ‘unknowns’ regarding the assets, and to reflect uncertainty at the time regarding the real estate market. By retaining an interest in asset portfolios, the RTC was able to participate in the extremely strong returns being realized by portfolio investors. Additionally, the equity partnerships enabled the RTC to benefit by the management and liquidation efforts of their private sector partners, and the structure helped assure an alignment of incentives superior to that which typically exists in a principal/contractor relationship.”
If this is the case, why wouldn’t they simply explain it? Or do they want to disguise the method of payment for public relations purposes?
- “The selected general partner paid the RTC for its partnership interest in the assets. The price was determined by the so-called Derived Investment Value (‘DIV’) of the assets (an estimate of the liquidation value of assets based on a valuation formula developed by the RTC), multiplied by a percentage of DIV based on the bid of the selected general partner. The general partner paid its equity share relating to each pool at the closing on the pool. The RTC retained a limited partnership interest in the MIF.”
- “The MIF asset portfolio was leveraged by RTC-provided seller financing. The RTC offered up to 75% seller financing, and one element of the bid was the amount of seller financing required by the bidder. Because of the leverage, the amount required to be paid by the MIF general partner on account of its interest was less than it would have been if the MIF had been an all-equity transaction.”
Has the FDIC implemented any special financial controls to prevent the loss of accountability or actual funds?
Question: Considering the amount of money that was never accounted for by the Resolution Trust Corporation and the number of lucrative sweetheart sales of assets and loan forgiveness, what controls are in place to prevent fiscal hanky-panky or politically-motivated solutions to asset disposition?
Question: Will the actual details of these FDIC transactions be revealed to the public?
Question: What warrantees and representations were made by the FDIC to PennyMac? By PennyMac to the FDIC?
Pardon my cynicism, but …
Considering the depth of the current recession and the financial manipulation of assets which occurred on the government’s watch, I am somewhat skeptical of federal agencies who might be making self-serving deals that do not benefit the public as much as the benefit politically connected democrats and their special interest friends.
What can YOU do?
If you are of an entrepreneurial inclination, you may want to consider how you too can profit from the current financial situation.
Be skeptical of financial deals announced in the media as they often turn out to be quite different from what was originally reported.
Be well and be safe.
A reminder from OneCitizenSpeaking.com: a large improvement can result from a small change…
The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane. -- Marcus Aurelius
"The object in life is not to be on the side of the majority, but to escape finding oneself in the ranks of the insane." -- Marcus Aurelius