Profile | Wilbur Ross, buyer of failed companies

Wilbur Ross, the billionaire who specializes in resurrecting failed companies, is betting the U.S. mortgage market will rise from the dead.

"We're looking at everything that's in trouble," said Ross, founder of New York-based WL Ross & Co.

He won an Oct. 5 auction for the home-loan-servicing unit of Melville, N.Y.-based American Home Mortgage Investment.

Ross agreed to pay between $435 million and $500 million for the right to collect payments and maintain escrow on about $45.3 billion of mortgages from the biggest residential lender to go bust this year.

His company has also joined with Richard Branson's London-based Virgin Group to bid for Northern Rock, the British lender bailed out by the Bank of England.

Dubbed the King of Bankruptcy by clients during his quarter century at the Rothschild investment bank, Ross, 69, is entering the market as more borrowers quit making payments and profits sink in the servicing business, according to the Washington-based Mortgage Bankers Association.

"They will probably have their hands full the next couple of years," said Bose George, an industry analyst at Keefe Bruyette & Woods in New York.

Ross' pattern has been to acquire one bankrupt company in an industry and augment it by buying similarly distressed companies.

In textiles, Ross began with Burlington Industries and Cone Mills, both based in Greensboro, N.C., creating International Textile Group. Then he expanded with joint ventures in places such as Turkey and India.

LTV jackpot

Ross turned an $80 million grubstake in Cleveland steelmaker LTV into $4.5 billion in 2004 when he sold International Steel Group to Indian billionaire Lakshmi Mittal.

He has not always been so successful.

Ross bought into the coal industry in 2005, assembling International Coal Group from the mines of bankrupt Anker Coal Group of Morgantown, W.Va., and Coalquest Development of Ashland, Ky. He paid $275 million in stock, then raised about $250 million in an initial public offering.

Since April 2006, the company has lost more than 40 percent of its value.

Ross said he has the means and desire to expand American Home's business. His company, AH Mortgage Acquisition, will pay cash and has room to borrow, he said.

"The servicing platform that we're getting at American Home is capable of handling any kind of home-mortgage product," Ross said.

With little additional expense, the company could process up to three times its current volume, he said.

In the mortgage business, Ross said he will eventually expand into lending.

"If you want a growing business, you need to be in some form of originations," he said.

The number of borrowers behind on their payments hit a five-year peak in the second quarter, the Mortgage Bankers Association reported. The figure may climb by the end of 2007 as interest rates jump for 450,000 borrowers with subprime adjustable mortgages, according to data compiled by UBS and Credit Suisse Group.

Subprime mortgages go to borrowers who are considered risky or have bad credit records.

"I would see an increase in the cost of servicing a loan for this year," said Marina Walsh, a senior director in the Mortgage Bankers Association's research and economics department. "Late payments can get pretty time intensive, and you have to hire people with a certain skill set who have to be trained."

Per-loan profit for servicers declined by 44 percent to $58 in 2006 from $104 in 2005, Walsh said.

To succeed, Ross will have to coax delinquent borrowers to pay again or, in industry jargon, get non-performing loans to perform, said Jeffrey Kirsch, chief executive of Miami-based American Residential Equities, which specializes in getting people to pay overdue mortgage bills.

"There are not a lot of firms out there able to handle non-performing loans," Kirsch said.

American Home is not known for its expertise in the field, he said.

Many of the mortgages Ross will service were to applicants who didn't document how much money they made, said Keefe Bruyette's George.

Alt-A mortgages, a specialty of American Home, are available to borrowers with good credit who generally cannot or choose not to verify their income with pay stubs or tax forms.

Default rates of Alt-A mortgages are difficult to predict because they are a new product, and that uncertainty may be a pitfall for investors such as Ross, said Steve Moyer, a director at Santa Monica, Calif.-based Tennenbaum Capital Partners, which oversees about $7 billion.

The same is true of adjustable-rate mortgages, he said.

Almost half the home loans of the past two years were adjustable, according to Inside Mortgage Finance, a trade newsletter.

That means borrowers pay a lower interest rate the first two or three years and higher rates later.

"Brave new world"

"It will be a brave new world now for all of us, how those loans will perform with declining home prices," Moyer said.

Falling prices make it difficult for borrowers to sell or refinance mortgages because they may owe more than their houses are worth.