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PennyMac Addresses Perceived Conflict of Interest

Stocks in this article: BAC PMT PFSI

NEW YORK ( TheStreet) -- PennyMac Mortgage Investment Trust (PMT - Get Report) defended itself Tuesday against charges its CEO, Stan Kurland, is conflicted in running the company due to his role as CEO of a separately-listed affiliate, PennyMac Financial Services (PFSI - Get Report).

"We recognize that there has been, uh, chatter in the marketplace recently about PMT's relationship with PFSI, some of which is poorly informed, so I want to spend a moment addressing it head on," said Andrew Chang, PMT's chief business development officer in a presentation to a full room at the Keefe, Bruyette & Woods 2013 Mortgage Finance Conference in New York.

PMT has an outside investment manager, PFSI, which collects fees from PMT as well as alerting it to potential business opportunities. Though the arrangement is fairly common among mortgage REITs, that doesn't mean there is no conflict of interest. It just means that investors need to decide whether they are comfortable with it.

Still, the PennyMac companies are subject to greater-than-usual scrutiny since they are run by several former executives who, like Kurland, previously held top positions at Countrywide Financial. Countrywide, which was acquired by Bank of America in 2008, has been a poster child for poorly-underwritten mortgage risk.

The New York Times highlighted the conflict faced by Kurland in an article last month. Simply put, the potential conflict is that Kurland has a far larger financial interest in PFSI and so might be incentivized to make decisions that would be uneconomic for PMT in order to benefit PFSI.

Chang devoted one out of 15 slides to the addressing the question, which can be summarized by the boilerplate statement that "we believe that PMT has in place the proper agreements, controls, and oversight to mitigate potential conflicts in its relationship with PFSI."

What is noteworthy about Chang's mention of the issue is that investors continue to ask questions about it. PFSI shares are up roughly 0.7% versus a more than 5% loss since the publication of the Times article. PMT shares were up more than 3% on Tuesday, however, and moved higher following Chang's presentation even as the S&P 500 was flat.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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