With subprime mortgage business’s in trouble as loan volumes plummets, and defaults rise the smart money people see an opportunity in taking over these businesses. According to Steve Probst, national sales manager with Fairway Independent Mortgage, a “lot of people are betting that the market will snap back quickly.”
However, it is a risky situation for investors as many parts of the country are currently suffering from a glut of unsold homes resulting in defaults and foreclosures rising thus causing values to plummet. Some industry officials worry that if investors infuse new capital into the market at this time it may refuel aggressive and risky lending to people with poor credit, known as subprime borrowers, delaying a much needed winnowing of the business.
However, this fear is making little impact on investors like Cerberus Capital Management, one of the country’s largest private equity firms, that made its name investing in distressed properties and has most currently taken over control of the troubled Chrysler Corporation. While also taking over other mortgage giants it is still uncertain if Cerberus will operate as one big company or allow each of the taken over companies to operate autonomously.
In other areas, rising mortgage defaults and a credit squeeze on Wall Street have forced many subprime mortgage companies into bankruptcy, causing many analysts to suggest that the industry could shrink by as much as a third. Of course, many officials acknowledge that the industry needed to be culled of those lenders who led in making risky loans and forcing rivals to match them or lose business.
Private Equity firms, however, have taken a brave front in infusing companies that wrote nearly 20 percent of last year’s $600 billion in subprime loans with fresh capital. Using that information as their basis for optimism, industry officials suggest that this quick bet on distressed businesses may suggest the early phase of another long-term retrenchment. It is, however, important to note that the investors who are buying the subprime mortgages are demanding high-quality loans after being burned by high rates of defaults and fraud in loans written during 2005 and 2006. In turn this has tightened the criteria for those seeking a loan by requiring bigger down payments substantiated by good credit histories.
On the negative side of this issue is Jeffrey Kirsch, president of American Residential Equities who states, “The reality is that the mortgage business for the foreseeable future is not a growth business and buyers like Cerberus will have to be willing to lose money and invest in the companies they are acquiring for some time before things pick up. Those concerns are a major reason other subprime lenders have not succeeded at selling assets and that still others have secured more concessions than would have been possible even six months ago before agreeing to invest additional capital.
[tags]Investors, Investments, Business investments Cerberus, Subprime, mortgage lenders, American Residential Equities, Wall Street, Risky loans, Market depression[/tags]