Discouraged about the dearth of subprime products or the availability of jumbos? Wilbur Ross may be your next wholesale lender.
While the Federal Reserve was conducting secret meetings with 30 top banks two weeks into September, Wilbur Ross was preparing to bid for the mortgage servicing assets of Michael Strauss’s bankrupt American Home Mortgage Investment Corp.
The Fed was trying desperately to avoid further catastrophe; Ross was carefully preparing to create profit from the ashes littering the devastated financial landscape.
He’s likely to do so. Three things tilt the scales in his favor.
- Track Record. On October 5th, his bid won. While Ross doesn’t always come out on top, he always has a plan. Here the plan in his own words: “…WL Ross portfolio companies raised $2 billion this year to eliminate outside financing needs. More recently, we provided a modest $50 million debtor-in-possession financing to American Home Mortgage, the tenth-largest subprime lender, as it entered bankruptcy. Ultimately, we will make a major move into mortgages, because lending to weak borrowers makes sense at premium rates with proper due diligence and appraisals. After Japan’s real estate bubble burst, we used a similar strategy to rehabilitate Kansai Sawayake Bank. It was earning 17% a year on equity after one year, almost twice the return typical of a Japanese bank.” Wilbur Ross, Fortune magazine
- Smarts. CEO’s are a dime a dozen. Wilbur Ross isn’t your average CEO. Quiet, soft-spoken, and not given to profanity, he’s in a league with the likes of Warren Buffett. If Rudy Giuliani wins the Republican nod as 2008 presidential candidate, look for Wilbur Ross to figure into the campaign behind the scenes. He served as privatization advisor to the very successful Mayor Rudolph Giuliani.
- Automation. Here’s a shocker. Little old ladies with letter openers have nothing to do with payment processing in the mortgage industry. Instead, $400,000 systems by little known (and privately held) OPEX Business Machine Corporation of Moorestown, NJ ingest payments from the public at the rate of 3 envelopes per second, process them in a 3.5 second paper path, and spit out data files and image files. That’s 10,000 envelopes per hour per system. With one operator! Giants Countrywide Home Loans and Option One Mortgage, as well as national banks like Chase and Wells Fargo have used these systems (and their predecessors) for more than a decade. 3 payments per second, at an average of $1,000 per payment… You do the math.
The systems provide economic efficiencies of scale that are otherwise impossible, and with a much greater degree of accuracy than is possible when a person touches the payment.
Marina Walsh, a senior director in the Mortgage Bankers Association’s research and economics department, is quoted by Bloomberg.com as saying that “Per-loan profit for servicers declined by 44 percent to $58 in 2006 from $104 in 2005.” Wilbur Ross expects to reverse that trend.
There are $10 trillion in home mortgages outstanding in the US. Ross’s AH Mortgage Acquisition Co. services $45.3 billion of these. Ross believes he can triple that with little additional cost.
The next step? There’s a tremendous pent up demand for subprime and jumbo mortgage products. Wilbur Ross intends to meet that demand at some point in this cycle. “If you want a growing business, you need to be in some form of originations,” says Ross. “It could be jumbos, it could be subprime, it could be whatever.”
The New York Times likes to refer to Wilbur Ross as a Vulture Investor. He doesn’t see it that way. “We spend a lot of time trying to figure out which industries will go bad a year from now,” he says, “and then within that universe, we try to figure out which companies are salvageable.”
content and photo copyright Michael W. Jones
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