The New Robber Barons: The Mortgage Thieves are Back
Posted in Economic Justice on 04. Mar, 2009
My friend, Christopher Earle, is an accomplished writer, editor, and photographer living in Englewood, Colorado. His background includes journalism, business writing, technical writing, and procedure writing. He has worked on a freelance basis for NPR and the Associated Press, just to name a few. He spent his early childhood in the Caribbean and has spent 12 of the last 20 years in Asia. He is a progressive thinker, involved in local and national politics, as well as interested in topics ranging from consumer protection to the environment and how these affect regular people.
I’ve asked Christopher to talk to us about a subject that inspires lots of passion in him, the mortgage industry.
Guess who is coming to your mortgage refinance negotiations? According to an article in the New York Times, it’s the man accused in lawsuits, including one filed by the comptroller of New York State, of misleading his investors about risks the company was taking and being well aware of risks of sub-prime mortgages to both his company and homeowners. These unethical mortgage and business practices resulted in the near total collapse of Countrywide Financial and the devastation and destruction of countless lives from the resulting foreclosures.
The man is Stanford L. Kurland, ex-President of Countrywide. The man who sold his interest in Countrywide for nearly $200 million just before leaving the company is now head of Private National Mortgage Acceptance Corporation, d.b.a. PennyMac. The name is appropriate. They’ve been going around buying up, for pennies on the dollar, the same type of delinquent sub-prime loans that Kurland helped create. The loans are being bought from the Federal Deposit Insurance Corporation (FDIC), who acquired them from failed banks. The bank failures were a result of the same type of industry wide greed and lack of ethics he helped foster while at Countrywide.
The financial backing of PennyMac is coming from major players like BlackRock, the investment manager, and Highfields Capital, the hedge fund. In addition, Kurland has put in some of the $200 million he made from the sale of his Countrywide stock just before leaving he left the firm.
PennyMac paid the FDIC $43.2 million for $560 million worth of delinquent residential mortgages. That is 7 cents on the dollar. Did you get that? Seven cents. Although these loans weren’t originated by Countrywide, they are the charred remains of the now insolvent and FDIC owned First National Bank of Nevada. These loans resemble the types that Countrywide once offered, many with initial teaser rates that would go up suddenly, leaving homeowners unable to make the new and “improved” payments. PennyMac is allowed to keep 20 cents of every dollar it collects on the defaulted mortgages. Eventually, they will be allowed to keep 40 cents. They are planning on building their current $800 million dollar portfolio to around $15 billion within the next year and a half. That could translate into nearly $5 billion dollars in additional profits. Profits for the same people who have already made billions from now failed banks and finance companies bought and bailed out by you, me, and everyone else who pays taxes.
The way it is working is like this: PennyMac buys a $500,000 mortgage from the FDIC for 7 cents on the dollar. This works out to $35,000. They then offer to cut the homeowner’s interest rate from 7% to 3%, cutting the homeowner’s payments almost in half. They can do this because they paid virtually nothing for the loan. They are allowed to keep 40% of the new loan value, which is $250,000. Their return on their investment is $100,000. The FDIC, which is really you, me, and other taxpayers, get $150,000 plus the initial $35,000 that PennyMac paid for the loans. We get $185,000. The interest paid by the homeowner on the initial loan is locked securely away in the bank accounts of people like Kurland, BlackRock and Highfields Capital.
Better than nothing? Sure. The thing is this: Kurland, Countrywide, and the entire banking industry made obscene profits writing these loans in the first place. We are now rewarding them by giving them obscene amounts of money to work as a glorified collection agency undoing the mess they created in the first place. Look at the numbers. The FDIC could hire at a couple of people for $100,000 to renegotiate loans directly with homeowners. We taxpayers wouldn’t get as bad of a deal as we are now getting. We wouldn’t be rewarding the greed of Kurland and his type.
And what of Kurland? It seems fundamentally wrong that he personally made $200 million dollars from writing these bad loans. Now he will make tens or hundreds of millions from cleaning up his own mess. He, and everyone else involved in the sub-prime mortgage mess, should be prosecuted for racketeering. Since that isn’t likely to happen, they should, at a minimum, be banned from ever working in the mortgage or banking industry. Would this be a “brain drain” for the mortgage industry? These people are the ones whose greed created the problem. Are they the “brains” you want in banking and finance? I sincerely hope not.
