Equity Firms Look at Mortgage Lenders as Value Buys

A day or so ago we posted about the fact that Mr Warren Buffett, widely held as the greatest investor of all time, was getting into the manufactured home business right when everyone else is bailing out on the real estate market. It’s called contrarian investing, and Mr Buffett isn’t the only one doing it.

CNNMoney.com is reporting that JC Flowers and Co are making a bid for Northern Rock, PLC – a huge (and dying) mortgage lender in the United Kingdom. CNN calls Norther Rock “the biggest casualty of the global credit crunch.”

This story makes a good case study in some basic investing concepts. One, as Warren Buffett shows us, is that it’s often wise to get in when everybody else is getting out. Another is that certain businesses are cyclical in nature, but over the long term they can be hugely profitable if their cyclical nature is managed correctly.

Take the mortgage business. Northern Rock overextended itself with its cash and as the credit crunch came on, money became very very tight. So many mortgage lenders got in over their heads over the last couple of years because the market was so hot for loans and they wanted to grab as much of the pie as they could.

It’s a shortsighted thing to do though. In the world of interest rates and housing demand, it’s completely predictable that what goes up must come down. Big lenders gave money out like there was no tomorrow, but tomorrow came and the market conditions that made them irrational didn’t hold up. What does that mean? Bankruptcy and buy-out.

In matters of money it’s wise to keep an eye on the future and both feet planted in reality. You can either be the one that rides the wave and then crashes, or you can be the one to wait for the crash and then swoop in and make a killing cleaning up the mess. It’s your choice.