Billionaire investor says now is right time to give home loans

Private equity firm WL Ross is convinced that Ireland will rebound but warns of ‘moral hazard’

BILLIONAIRE INVESTOR Wilbur Ross believes some will think he and his fellow members in the consortium bidding for an Irish lender have lost their minds.

However, an investment by WL Ross in Educational Building Society (EBS) is as “counter-intuitive” as the firm’s recent purchases of banks in Florida and Michigan, two of the states worst hit by the US subprime mortgage meltdown.

“That is our job,” says Ross of his investments in businesses that others would see as far too risky.

He is an investor in Virgin Money in the UK which is buying small troubled banks. Buying into European banks makes sense because if Ross buys more than 24.9 per cent of a US bank he must offload his firm’s industrial investments. And he has plenty of those.

He has invested in an aircraft lender and lessor, International Lease Finance Corporation, which was previously a subsidiary of embattled US insurer AIG. He is one of the world’s biggest owners of rail-freight cars, which carry substantial residual value after full depreciation, and invested in the US steel industry when it was on its knees.

So why would a Manhattan private equity firm intent on big returns from buying distressed businesses want to invest in an Irish building society set up 75 years ago to help teachers buy homes?

Ross points to his firm’s investment in a failed $7 billion (€5.12 billion) Japanese bank which went bust because of bad property loans. The company refocused the bank as a retail lender. Within a year it was earning a 17 per cent return on equity.

“After a crash in property values has to be the right time to be making mortgage loans because now you are coming in at some sort of loan-to-value ratio on a value that is very depressed,” he said.

“In some markets house values are below construction costs so how risky can that loan be on a long-term basis? People are going to need shelter and especially because we are convinced that Ireland will really rebound.”

The consortium would maintain EBS as a “community bank” and, like its bank in Florida, could lend more with new investment and take a far greater share of the market.

Despite international fears that Ireland will default on its debts, Ross is convinced about the long-term Irish economic story and its ability to bounce back.

Once the banking “cancer” is removed, Ireland should recover and Ross believes there will other opportunities to invest in Irish banks, but that this was not contingent on Cardinal’s offer for EBS.

Ross admits the consortium is struggling to assess how the traditional value of home ownership in Ireland will determine the ultimate level of mortgage losses at EBS and the desire of borrowers to meet their repayments. “There are literally unemployed people who are still making their mortgage payments which, in one sense, is a very positive sign,” he said.

However, Ross warns that moral hazard is a problem as many mortgages in Florida are “strategic defaults” where borrowers realise they can hold on to their house for a year without making payments while banks foreclose on them.

“In Florida there are some cars with bumper stickers that say, ‘honk if I am paying your mortgage’,” he said.

One of his other investments is in a company that services 450,000 subprime mortgages worth $100 billion across the 50 US states. “Part of our group has had much more experience dealing with problem mortgages than all the banks in Ireland put together,” he said.

WL Ross vice-chairman Jim Lockhart, a former regulator of Fannie Mae and Freddie Mac, said he was surprised after such a property crash in Ireland that mortgage borrowers were still managing to meet their repayments. Three months’ mortgage arrears in the US are about twice the level in Ireland.

Ross said a Cardinal takeover of EBS would inject €525 million that the Government would otherwise have to provide and show international markets that Ireland can attract overseas investment at a difficult time. “Assuming the Government goes our way, the fact that sophisticated foreign capital [is] coming into a bank we think it will help clear the air,” he said. “It will probably encourage other people to come in and bid on other banks.”