The Greater Fool Theory?

Implications: Mr. Ross' acquisition of American Home Mortgage's servicing unit is a bold attempt to continue his legacy of "turnarounds" in the business arena. Like Merrill Lynch's purchase of First Franklin, Ross' move may disprove the adage "when there's blood in the streets, buy real estate", and prove the "Greater Fool Theory" by overpaying for an unproven asset.

Analysis: The Brave "New World" of the Mortgage Industry, so described by Mr. Ross in the Bloomberg article, is evidence that there are those who still have faith that the sins of the past can be rectified, and the sinners forgiven.
However, unlike Aldous Huxley's anti-utopian view of the world, Mr. Ross is looking at this transaction through rose-colored-glasses. Forget the servicing costs of both collection and 'work-out', which will inevitably happen with Alt-A lending, the ugly truth will become apparent, but at the cost of the investors who follow him into this financial abyss: there are loans that just should not have been made. Whether it's the $85,000 a year video clerk, the $70,000 grocery store clerk, or the $100K bank teller (these are actual applicants who have received 100% financing through AHM), these applicants are in-over-their-heads: the rule-of-thumb for mortgage lending is that the profits of 20 loans will be eaten up by the loss of one (not even considering the overly aggressive appraisals that were closed in the Detroit, St. Louis, and Florida regions). With this in mind, Mr. Ross will be hard pressed to find the golden-nugget in the new pile of coal he has purchased. (see International Coal Group).