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Turnaround Specialist Hopeful of Mortgage-Market Revival
Wilbur Ross Jr., chief executive of WL Ross, recently won an auction for the home-loan servicing unit of American Home Mortgage Investment.
(By Mark Lennihan -- Associated Press)
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Jumbo loans are mortgages of more than $417,000.
Government policy has helped boost Ross's past investments, including trade tariffs levied against overseas competitors in the steel industry.
Ross has not endorsed any particular government action in the mortgage market. Democrats in Congress have proposed that Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, be allowed to buy subprime mortgages.
"I don't think you can ever legislate people against making foolish loans," Ross said. "My guess is there will be stricter constraints against what people have come to view as predatory lending practices. In terms of solving the problem of people who simply can't pay, it's not terribly clear to me what they can do to help them. Somebody has to take the loss."
Ross is investing in the mortgage industry at the same time as Goldman Sachs Group and Bank of America. Goldman, whose third-quarter earnings rose 79 percent partly on bearish mortgage investments, may buy Litton Loan Servicing, which specializes in collecting payments from delinquent borrowers, according to people familiar with the matter.
Bank of America said Aug. 22 it would invest $2 billion in Countrywide Financial, the biggest U.S. lender, less than a week after Countrywide said it tapped $11.5 billion of emergency financing.
"The play right now is in buying these institutions and cleaning up what they did," said Peter Morici, a business professor at the University of Maryland. "Somebody is going to have to make jumbo mortgages going forward and somebody is going to have to make subprime mortgages."
The U.S. home-loan market has $10 trillion of loans outstanding, the most ever, according to data compiled by the Federal Reserve. Subprime mortgages made up about 20 percent of the mortgages issued last year and about 11 percent in the first half of 2007, according to Inside Mortgage Finance.
"There's nothing wrong with lending to weak credit," Ross said. "There is something wrong with doing it at discount rates and without proper documentation and without conservative appraisals."
Ross won't predict how much longer tightened credit will pinch the mortgage industry. The time frame does not matter, said Kirsch of American Residential Equities.
"He's not building for today, he's building on the future," Kirsch said. "He's banking on the fact it's a cycle and he'll be ready to roll when it comes around."
Jody Shenn in New York and Kartik Goyal in New Delhi contributed to this report.
