Former Countrywide execs aren't done making money on the subprime crisis just yet; now they have a plan to profit by saving homeowners from foreclosures.

Pulling an old woman from a burning home is a heroic action. But what if the hero was the one who started the fire in the first place? That's the question that's causing a publicity problem for the new mortgage company PennyMac.

Responsibility for foreclosures

PennyMac is calling itself a specialty finance company. The entity purchases at-risk or defaulted mortgages and converts them into performing assets, primarily through loan modifications. The profitability of the business model relies on PennyMac's ability to obtain the bad mortgages at steep discounts. That's not a hard thing right now, because the U.S. government is ready to play ball by liquidating batches of troubled loans.

The PennyMac mission is likely to work against rising mortgage defaults and home foreclosures, which is a good thing. Unfortunately, the company has a big skeleton that's been ousted from the closet: PennyMac's senior management team consists of former Countrywide executives.

If you've forgotten about Countrywide, here's a little reminder: A year ago, campaigning presidential candidate Barack Obama described Countrywide as "the folks who are responsible for infecting the economy and helping to create a home foreclosure crisis."

Subprime teasers and stated incomes

In the heyday of mortgage lending, Countrywide was chasing after subprime mortgage borrowers with teaser loans and stated income mortgages. Both were prone to abuse. Teaser loans were given to borrowers who clearly couldn't afford the payment once the teaser rate expired. And stated income loans became a strategy for allowing borrowers to lie on their mortgage applications.

Certainly the borrowers involved in many of these cases should have known better. But Countrywide's aggressive pursuit of those subprime loans is generally labeled as something between grossly irresponsible and flat-out fraudulent.

New loan modification day

Now, former Countrywide president Stanford Kurland and his cronies are gearing up to turn profits on loan modifications under the PennyMac banner. They say that they have the experience to get the job done, to get homeowners back on their feet. This may be true, but critics find it distasteful that executives who profited from the industry's downfall would try to milk a few more bucks from the government-funded recovery.

PennyMac has already inked one major deal with the FDIC. The company paid the FDIC $43.2 million in exchange for 20 percent of the income produced on a mortgage portfolio valued at $560 million. PennyMac will rely on its own resources to effect loan modifications and get those loans back to performing status.

One has to wonder what President Obama thinks about the PennyMac transaction, given that he called out the Countrywide people pretty harshly last year. Could he have already forgotten who started the subprime fire? Or is it just that no one else is volunteering to pull the old woman from the burning home?

Published on April 2, 2009