CALABASAS, Calif. — Rows upon rows of desks sit empty at the offices of Private National Mortgage Acceptance Co. LLC.
At this stage in the cycle, the buyer and servicer of distressed home loans, known as PennyMac, had expected its call center to be filled with 250 chattering voices. But during a visit last week, there were only 10 people manning the phones, and the cavernous room was quiet.
Bankers' reluctance to sell dicey mortgages at discounts — and take a capital hit — has meant business is slower than planned.
Even though it is not getting as much work as it wants, PennyMac says it is getting results, in part because of a loan modification strategy borrowed from the Federal Deposit Insurance Corp.
In February, the same month it bought the $558 million loan portfolio of the failed First National Bank of Nevada from the FDIC, PennyMac tweaked its requirements for rewriting loan terms. Before finalizing a modification, it now requires the borrower to send in one payment at the proposed new rate along with the signed modification documents.
That policy, which the FDIC had used with the $16 billion IndyMac Bank portfolio, has cut PennyMac's redefault rate dramatically, executives say.
"A lot of servicers do not require a payment before a loan mod," said Mark Suter, PennyMac's chief portfolio strategy officer. "We started off very early in our life doing mods, and we weren't as strict about it, and we saw the recidivism rate was a little higher — too high for our comfort."
Now the First National portfolio's redefault rate is "a small percentage" of the industry average of 40% to 50%, he said.
(The Home Affordable Modification Program, which the Obama administration introduced in March, goes further than the FDIC or PennyMac by requiring borrowers to make three payments during a trial period before a modification becomes permanent.)
PennyMac has modified 11% of all the loans in the First National portfolio and 30% of the delinquent ones, many of which are in high-foreclosure states like Florida, Arizona, Nevada and California, Suter said.
Profits, however, are another story.
PennyMac, founded in January of last year, set out to buy loans at a discount, get them performing again and resell them at a higher price down the road. In the meantime, it derives revenue from the continued payments from borrowers, as well as from property liquidations.
The volume of those cash-flowing activities "has not been sufficient to say whether we're profitable or not — it's just too early to tell," Suter said. "The trends have been positive, and we have an investor who's pleased with what we're doing, but we need more time on the path that we're on."
PennyMac was founded by Stanford Kurland, the former No. 2 executive at Countrywide Financial Corp. (now part of Bank of America Corp.), with backing from BlackRock Inc. and Highfields Capital Management LP.
Suter left Countrywide in 2007. He was the chief strategy officer at the company's thrift and was in charge of squeezing $25 million of extra revenue from a $15 billion portfolio of home equity lines of credit.
"Banks don't have new ideas to come up with ways to make money out of existing portfolios," he said, explaining how he targeted customers according to their loan balances and past drawdowns while relying heavily on incentives to encourage borrowers to take out an additional $5,000 on a home equity line.
According to Suter, PennyMac applies a similar targeted approach to loan modifications.
"We try to operate like an air traffic controller to see what's coming up ahead," he said. "Just because the borrower is current doesn't mean they got an extreme makeover and are now prime borrowers."
Scott Anderson, PennyMac's chief mortgage operations officer, said it typically makes calls to borrowers on the second day of the month, particularly to those who have a poor track record of paying on time or have low FICO scores.
When PennyMac sent out welcome letters to borrowers in the FDIC portfolio, it received a spike in calls.
Suter said PennyMac's modifications reduce monthly mortgage payments, as a percentage of the borrower's income, to a level almost as low as the 38% required under the Obama administration program. (The government will match further reductions by a lender to bring payments down to a 31% debt-to-income ratio; servicers get a $1,000 fee for each completed modification after the three-month trial.)
The company seems to be bucking a trend in reaching borrowers who previously have never contacted their servicer.
Roughly 25% of borrowers cannot be reached, Anderson said; that figure is roughly half the industry average.
"We even had a borrower who had not paid his mortgage for 48 months" but was still living in the home, "and we got him to start paying again," he said.
Because PennyMac owns the loans it services, it is not subject to the modification restrictions that servicers of securitized mortgages face.
"When you don't own the loan or you're servicing for a securitized investor, the greatest benefit is to liquidate," Anderson said.
Jon Daurio, the chairman and chief executive officer of Kondaur Capital Corp., a Santa Ana, Calif., buyer of scratch-and-dent mortgages, said PennyMac's buy-low, sell-higher business plan "sounds like a winning formula."
But he cautioned that with sellers of distressed loans in a "wait-and-see mode," such a model may not be profitable.
"No one has any idea whether you're really going to be able to sell these loans for more than you paid for them," Daurio said. "What if housing prices drop another 30%? If things go dismally, as I predict, then you will have borrowers who could rent for less than the amount of a modified loan. But if two years from now the economy is humming again, then the model works."
In the meantime, the relative idleness at PennyMac's call center has produced a benefit for the borrowers who contact the company: They need wait only five seconds to talk to a representative, who can offer a modification in as little time as 15 minutes.