July 30 (Bloomberg) -- PennyMac Mortgage Investment Trust, the real-estate firm that will buy home loans and bonds, fell in its first day of trading after cutting the size of its initial public offering by 20 percent.

Underwriters for Calabasas, California-based PennyMac priced 16 million shares at $20 each, raising $335 million including a private placement, according to a company statement. The IPO had already been reduced from $750 million on July 16. Bank of America Corp., Credit Suisse Group AG and Deutsche Bank AG led the offering.

The shares lost 4.5 percent to $19.10 in 4 p.m. New York Stock Exchange composite trading.

PennyMac is seeking to make money by buying mortgages from failed banks and redoing the terms. Chief Executive Officer Stanford L. Kurland, 57, was president and chief operating officer of Countrywide Financial Corp., the loan originator whose co-founder, Angelo Mozilo, was sued by the Securities and Exchange Commission. Ten other senior officials also worked at Countrywide, whose subprime loans posted a 39 percent delinquency rate, according to data compiled by Bloomberg.

“People who are critical of Wall Street will find with justification things to criticize here,” said Stanley Nabi, who oversees $7.5 billion as vice chairman of Silvercrest Asset Management Group in New York. “They’re going to say, ‘Look, these are the people who created this crisis, and now they’re buying this paper on the cheap.’”

BlackRock, Highfields Capital

PennyMac operates in a growing market. More than 1.5 million properties received a default notice or were seized in the U.S. during the first six months of 2009, a record, according to RealtyTrac Inc., which sells mortgage data. Backed by BlackRock Inc. and Highfields Capital Management LP, PennyMac plans to charge fees similar to those at hedge funds as it tries to rehabilitate loans.

Rising default rates at Countrywide drove its shares down 91 percent through March 2008, prompting a sale to Bank of America Corp., based in Charlotte, North Carolina. Mozilo, who co-founded Countrywide in 1969, was sued in June by the SEC for allegedly hiding the company’s deteriorating finances.

Kurland quit Countrywide in September 2006, ending a 27- year career with the largest U.S. mortgage lender. Once considered Mozilo’s likely successor, Kurland was replaced by David Sambol, one of two top Countrywide executives who the SEC sued along with Mozilo. No one at PennyMac was a target of the lawsuit.

Failed Banks

Ray Johnson, a spokeswoman at PennyMac, declined to comment.

The real-estate investment trust will buy loans from failed lenders as well as mortgage companies and insurers. In January, it purchased $558 million of mortgages that the Federal Deposit Insurance Corp. acquired last year after First National Bank of Nevada failed.

The collapse of the U.S. mortgage market has caused more than $1.5 trillion in losses at financial institutions worldwide and prompted the FDIC to close 64 U.S. banks this year, the most since 1992.

PennyMac’s investments may return 15 percent to 25 percent a year, said Evan Gentry, the founder and chief executive officer of G8 Capital, a private buyer of distressed loans and real estate based in Ladera Ranch, California. Two of Gentry’s funds use a similar strategy.

76% Retreat

A Bloomberg index of mortgage REITs plunged 76 percent in 2007 and 2008 and fell 23 percent this year through March 5. It then surged 40 percent, trailing the gain in the Standard & Poor’s 500 Index by more than 5 percentage points.

PennyMac executives plan to charge a management fee equal to 1.5 percent of shareholders’ equity plus an incentive fee that’s one-fifth of profits above a certain level. It would be the first REIT since 2007 to succeed in charging an incentive fee, which are standard among hedge funds. At least six other mortgage-related IPOs are pending, five of which also aim to collect incentive fees.

Investors may agree with PennyMac that its connection with Countrywide is an asset, said Matthew Howlett, who analyzes real-estate securities at Fox-Pitt Kelton Inc. in New York. PennyMac’s offices are less than five miles from Countrywide’s.

“They understand the reasons a lot of these borrowers ended up defaulting,” he said. “They’re uniquely positioned to identify and correct them, and that can be enormously profitable in this environment given the prices.”

PennyMac’s strategy may rely too heavily on the assumption that investor appetite for mortgage assets will recover, said Terry Wakefield. He is a consultant to the residential loan industry who helped design Fannie Mae’s mortgage-backed securities business in 1981 and later traded the derivatives at Salomon Brothers Inc.

“Where are they going to sell those loans, assuming they’ve been effectively modified?” Wakefield said. “I don’t know a lot of people standing in line to buy those assets.”

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net

Last Updated: July 30, 2009 16:03 EDT