Why the PennyMac-FDIC Home Mortgage Deal Is Important
The basis of the financial crisis has been home mortgages, but so far every remedy seems to address every other monetary ill but that one.
Indeed, Secretary of the Treasury Henry "Hank" Paulson touted his $700 billion bailout program as a way to clean up toxic debt but the program has since morphed into many other things. Among them, of course, is tossing lifesavers to his buddies on Wall Street. Less influential homeowners on Main Street have been left doing the dog paddle.
That is why a development on Jan. 7 is important. The FDIC announced that it is selling $558 million in residential mortgages to the Private National Mortgage Acceptance Company (PennyMac). The mortgages come from the First National Bank of Reno, Nevada which went bust and was taken into receivership by the FDIC last July.
A source close to the deal says that this is the first ever "structured" sale of residential mortgages by the FDIC. The idea is that if more deals can be done to sell off mortgages involved in defunct banks, a lot of troubled debt will be cleaned up. In turn, confidence will be boosted and more credit, which is certainly available, will be loosened up, buoying an economic recovery.
Similar structured sales have been done before, but a source tells me they have involved commercial properties. If the current deal with PennyMac works, the FDIC might try to dispose of more troubled mortgages from some of the 25 or so banks that failed in 2008.
Curiously, not all that much has been done since the crisis got a head of steam late last summer to clean up housing mortgages. Big-name bankruptcies such as Lehman Brothers, federal bailouts of AIG and sell offs of big firms such as Merrill Lynch and Wachovia got all the headlines.
For her part, Sheila Blair, FDIC chairwoman, has been trying to get some movement on mortgages. Congress threw together a program that would help 400,000 homeowners avoid foreclosure, but initially there were few takers. Go figure. Plus, the FDIC has started a mortgage modification program which will help homeowners in arrears change their mortgage terms to fit their problems such as layoffs.
PennyMac, based in Calabasas, Calf., was formed last year by the investment firms of BlackRock and Highfields Capital. They are raising funds among their investor network to support the program. Servicing the mortgages will be handled by a subsidiary of PennyMac.
It will be curious to see how the incoming Obama Administration and its stimulus package will address such mortgage problems. But finally, it seems that someone is taking the right steps.