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Tess Vigeland: This week all three presidential candidates outlined their thoughts on the housing crisis. John McCain said the government shouldn’t bail out lenders or borrowers who “act irresponsibly.” Barack Obama proposed a $10 billion foreclosure prevention fund and Hillary Clinton called for legal protection for mortgage companies that help homeowners modify their loans.
Meanwhile, the private sector is struggling to come with its own fixes. This week, some former executives of Countrywide announced the creation of a new company called — deep breath here — Private National Acceptance Company LLC, PennyMac for short.
The company plans to buy up risky loans to help struggling home owners stay put.
Ashley Milne-Tyte has more.
Ashley Milne-Tyte: PennyMac will go to banks and offer to buy distressed mortgages from them on the cheap. Christopher Thornberg is with Beacon Economics.
Christopher Thornberg: What they will say to the bank is “We will buy this mortgage from you at a discounted rate, but that rate will still be above what you would get paid back if this home goes into foreclosure.”
For many banks, he says, the offer will come as a big relief. It’ll allow them to clear bad or risky loans off their books and that’ll improve their image with shareholders.
Stan Kurland is PennyMac’s CEO. He says once PennyMac owns the mortgage, the company will work with the homeowner to restructure the debt. That doesn’t mean that homeowners have to brace themselves for a man with a briefcase knocking on the door, although they might. Kurland says most of the time they’ll be able to arrange the restructuring online or over the phone.
Stan Kurland: We’ll be looking at their current credit status, what’s the value of the property, what has their past experience been in terms of the mortgage, job status…
And several other factors to determine how the owner can keep his home and pay off the loan. PennyMac starts making money when the borrower resumes paying interest. It stands to make big profits when the mortgage is finally paid down. Kurland says the company plans to buy whole mortgages, rather than pools of sliced and diced debt. He says they’re not ruling out buying those mortgage-backed bonds later on.
Christopher Thornberg says he’s not surprised PennyMac is holding off. He says those kinds of securities present a legal minefield to investors. A whole mortgage is a much more straightforward proposition.
Thornberg: Once you buy it from the beholding bank, it’s yours. There’s no secondary considerations of bondholders and things like that in the background you need to deal with, so it is a much cleaner transaction.
Which, with a little bit of tweaking, can start paying interest relatively quickly.
Jay Weiser teaches real estate at Baruch College in New York. He says there’s an irony here: former Countrywide executives made money lending to people who in a pinch probably couldn’t keep up the payments and now they’re making a buck rescuing those very same homeowners. Still, Weiser says, if PennyMac succeeds, it could act as an injection of antifreeze into a frozen market.
Jay Weiser: The way that busts get cleaned up and liquidity is restored is when somebody liquidates stuff at the bottom, so to the extent that there’s a buyer, these banks now have more capital. Perhaps they can make more loans and perhaps the market in general will get a little calmer.
Weiser says when PennyMac buys these loans, it won’t just siphon money back into the banks; it’ll pump confidence back into the economy. Then, once lenders get back to lending, buyers can get back to buying and the market and the economy can get back to growing again.
I’m Ashley Milne-Tyte for Marketplace Money.
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