PennyMac debuts with a thud
Mortgage firm run by ex-Countrywide execs flops in IPO. Buying bad loans makes sense, but competition's tough and banks don't want to sell on the cheap.
NEW YORK (CNNMoney.com) -- If you need more proof that the mortgage crisis is far from over, look no further than the tepid reaction to the initial public offering of PennyMac Mortgage Investment Trust.
PennyMac (PMT) is a real estate investment trust that wants to buy up distressed loans, modify the mortgages to keep borrowers in their homes and then sell the loans once their value goes up.
The company went public Thursday morning and finished the day 4.5% lower, at $19.10 a share.
It's an ominous sign for PennyMac, which originally filed to sell 20 million shares at $20 apiece but reduced the offering's size to 16 million shares -- likely a reflection of weak demand.
Why was there such a lack of interest, especially on a day when bank stocks helped fuel the overall market's surge?
Maybe it's the name. After the failure of lender IndyMac and the government takeover of mortgage financing giant Freddie Mac, a company dubbing itself as PennyMac may not exactly conjure up images of financial success.
Maybe it's guilt by association. Many of PennyMac's top managers, including CEO Stan Kurland, are former employees of Countrywide Financial, the troubled mortgage lender that was bought by Bank of America (BAC, Fortune 500) last year.
Kurland, who left Countrywide in 2006, was the lender's chief operating officer. Former Countrywide CEO Angelo Mozilo has since been charged with securities fraud by the SEC.
There are also a litany of significant risks listed in the company's prospectus. For one, PennyMac has a limited operating history. The company, which was only founded a year ago, has purchased some pools of distressed loans from the FDIC through a series of funds. But PennyMac has no revenue or earnings yet.
PennyMac also noted in its registration filing that "many of our anticipated competitors are significantly larger than we are and have stronger balance sheets and access to greater capital and other resources than we have and may have other advantages over us."
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But at the end of the day, PennyMac may simply be yet another victim of the painfully slow progress of the Obama administration's attempt to fix the mortgage mess.
The Treasury Department's plan to partner with private investors to rid banks of toxic mortgages, known as the Public-Private Investment Program, or PPIP, has been scaled back drastically. Many banks appear to be unwilling to sell the loans for such a reduced price.
And a foreclosure prevention program announced by the administration in February is off to a rocky start.
Regulators are pushing banks to do what they can to modify 500,000 mortgages for borrowers already in, or at risk of, default by November. But many homeowners have griped about how difficult it is to get their loans modified, partly due to banks being ill-prepared to deal with a deluge of applications.
All that may make it tough for PennyMac to thrive.
"Banks are loath to sell a lot of these loans because they would have to take a capital hit and acknowledge they made bad loans," said Merrill Ross, senior analyst with BGB Securities, a research firm owned by money manager Aegis Financial. "So banks may still want to try and work the loans out themselves. But at the same time, banks are overwhelmed with refi requests for mortgage modifications."
Then there is the issue of competition. There are already several other real estate investment trusts around that invest in mortgages, and many more are coming out of the woodworks to try and take advantage of the depressed values in the market.
"To buy loans at discount and work through them would seem to be a good way to play the upside in the housing market since not all of these loans will go bad. But there are a lot of companies out there going after the business. There are a lot of other distressed asset investors with similar ideas," said Jason Arnold, an analyst with RBC Capital Markets.
Invesco Mortgage Capital (IVR), a mortgage REIT managed by investment firm Invesco (IVZ), went public last month. Like PennyMac, it is trading below its offering price.
Earlier this week, Bayview Mortgage Capital, whose parent company is backed by private equity firm Blackstone (BX), filed for an IPO. And mortgage REITS backed by investment firms AllianceBernstein (AB), Apollo Management, Colony Capital and Starwood Capital Group have also filed for IPOs since the beginning of June.
Another analyst suggested that it's not as much fear of competition as it is the glut of mortgage REITS heading to the market that's scaring off investors.
"In reality, the pool of distressed assets is huge," said Matthew Howlett, an analyst with Fox-Pitt Kelton Cochran Caronia Waller. "But investors are viewing all of these companies going public as a cookie cutter type of thing. At some point, the market is going to be saturated."
To its credit, PennyMac attracted some notable investments prior to its IPO as well. Its two biggest backers are investment management firm BlackRock (BLK, Fortune 500) and Highfields Capital Management, a Boston-based hedge fund most well-known for shorting Enron's stock before it collapsed due to accounting fraud.
Ross said that the fact that there are so many ex-Countrywide officials at PennyMac could be a plus going forward. Since Countrywide was such a major subprime mortgage lender, it's possible that the company will have a leg up on other competitors about how to best undo the damage done.
"It's like taking a watch apart. Anyone can take it apart, but if you have the guy who put it together that makes a difference," she said.
Talkback: Do you think the Obama administration's plans to help homeowners has made a difference? 
