According to the New York Times, the former president of CountryWide Financial, Stanford L. Kurland, is back in the loan business, but this time seemingly profiting off of his screwups. CountryWide Financial (yes, I know Wikipedia) was one of the largest lenders of U.S. mortgages. Many of its loans were to high risk home owners with variable rate interest rates, that began low and then rose. This loans were then securitized and sold to investors. As people began to to default on their loans, investors did not want to own these securtized loans, ultimately leading CountryWide towards bankruptcy. Bank of America ended up buy CountryWide and has plans to rename it to Bank of America Home Loans in April, probably due to the huge reputational risk that the name CountryWide poses ( Lady Macbeth didn’t even wash her hands that fast). In short, the fall of CountryWide and other similar institutions has created large ripples through the economy. Many heads of banks, like Kurland, sold loans to people who probably should have never owned a home to begin with.
Kurland and some former members of CountryWide Financial are buying bad loans back from the government at very low prices, pennies for the dollar. They are then able to keep a piece of whatever they can get from the mortgage owner. Kurland has started a company called PennyMac to buy these loans. Below is a quote from the New York Times that sums up the business better than I ever could.
PennyMac, whose full legal name is the Private National Mortgage Acceptance Company, also received backing from BlackRock and Highfields Capital, a hedge fund based in Boston. It makes its money by buying loans from struggling or failed financial institutions at such a huge discount that it stands to profit enormously even if it offers to slash interest rates or make other loan modifications to entice borrowers into resuming payments.
Basically Joe the Plumber, (what too soon?), who was unable to pay for his CountryWide mortgage and almost lost his home, is able to get his same mortgage, that was previously bought by the government from PennyMac for a lower interest rate. PennyMac bought the mortgage from the government at rockbottom price. So if Joe, with the $5 of profit from his new book, pays PennyMac on time, then PennyMac has turned a profit (even at a lower interest rate).
Kurland has been criticized (whether deserving or not, the verdict is still out) for creating a culture of investing in high-risk mortgages. Kurland says that most of high-risk loans were bought after he left Countrywide in 2006 but he has been blamed for starting the trend. Either way, Kurland is profiting (possibly very much so, PennyMac is expecting at least 20% in returns) off of a crisis that he was partially involved in. As Margot Saunders, a lawyer with the National Consumer Law Center said
“It is sort of like the arsonist who sets fire to the house and then buys up the charred remains and resells it.”
So here I am, a little torn by Kurland’s actions. On one hand, Kurland is profiting from the mess he help to create(mess is a multi-billion dollar understatement). On the other hand, he is buying $800 million worth of loans from the government, that we as taxpayers now do not have to pick up. Meanwhile, some people who have been able to buy their mortgages have been helped. He also is very familiar with loans so he is probably better suited to doing this than someone in the government. What do you think?
The reason I bring up this entire situation, besides the fact that it makes you go hmmm, is that it reminds me of Enron playing the market in California. Enron was a heavy proponent of the deregulation of the energy market in California. Once the market was deregulated, Enron started manipulating the market (most legally) to its advantage, even though many Californians lost power and/or had to pay exuberant prices for their power, while Enron reaped millions in profits. Countrywide bet on high risk mortgages to make a hefty profit, lost the gamble, but now its former heads are still profiting off the situation they created. Even though there is nothing illegal about any of this and maybe its not unethical (since affected home owners may be able to save their homes), it just doesn’t feel right to me. I am waiting to hear Kurland say he is “on the side of angels,” too.