Lock and Load: Bargain Hunting the Mortgage Market Periphery

The sub-prime lending meltdown continues apace. For smart investors, the cratering of prices in lending land is a call to search for bargains. Ignore the media reports saying that the trouble will spread and bring the market to its knees. It won’t. To wit:

  • Sub-prime mortgages represent just a fifth of the mortgage market, and not all sub-prime borrowers are defaulting
  • The mortgage market is not the entire financial market
  • Therefore, the fears of sub-prime lender troubles killing the U.S. economy are overblown

The financial press is fixated on yesterday’s report from the Mortgage Banker’s Association that said the percentage of payments that were 30 or more days past due for all loans tracked jumped to 4.95 percent in Q4.

Well, guess what? That figure hit 4.97 percent back in spring 2003, and our Maximum Midcap portfolio is up more than 200 percent since then. We survived those delinquent mortgages; we’ll survive these.

At the moment, trying to find bargains among sub-prime lenders themselves would be nuts. They’re falling knives, to refer to the old investment adage of a stock that’s plummeting so quickly that trying to buy before it hits bottom will get you cut.

What I’m doing instead is searching among the periphery of the sub-prime situation for solid financial companies that are not overly affected by sub-prime defaults, but whose prices have been unduly cheapened by panicked sellers. Not every lender is in trouble. Not every financial company is a lender. Yet, the whole lot is being unloaded as if every financial instrument in America is in default.

If you’re a current Kelly Letter subscriber, look for a special report this weekend. If you’re not, now would be a great time to take advantage of my one cent, one month trial. Remember, 85 percent of all people who try it stick around. We’d love to see you become a happy member, too. Details here.

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