Photo Credit: Banks.com
The mortgage market has been nothing but extremely volatile over the past year. Traders have beaten down the stocks of companies carrying heavy amounts of sub-prime mortgage debt and virtually every name in the banking industry, whether exposed or unexposed to the dangers of faulty loans.
However, we might be telling a different story today, as the foreclosures and troubles of the past and foreseeable future have been priced into the many mortgage backed securities investments across the board. Huge sell offs have occurred, making investors wonder if this is just a temporary adjustment, or if the mortgage securities business is destined for failure.
No matter how you play this situation, investing in mortgage backed securities should not be on the priorities list. These are very speculative investments and are not meant for the faint of heart. On a whim, the value of these collateralized investments can fall huge percentage points as the general outlook for the housing market changes. There are two major viewpoints on the mortgage backed securities investments, which will be outlined below:
Bad debt has already been removed
The worst of debt in MBS products has been removed or already calculated into future potential, and investors have hit hard on these products, even as the mortgages were not in dire situations. The possibility is that traders have absolutely dumped these investments to the point where their assets are worth more than what the paper traders would like to give them for it, and therefore, the industry is in a point of turnaround. Government sponsored aid packages should fuel the fire of an impending home pricing rebound.
More mortgage adjustments coming ahead
Though 2007 and 2008 saw many mortgage adjustments, the period from 2009-2011 has virtually twice the amount of the early mortgage crisis. Lenders and mortgage packages may be priced in for some additional fallout of the market, but it is not nearly enough to cover your investment or to wade out the economic troubles coming ahead. Most banks are now unprofitable for amounts far beyond their current market cap, and without complete government nationalization, their failure is certain.
Approach with caution
Those are the two opinions we’re receiving from analysts in the housing market. At current prices, it might not be a bad idea to average yourself into the mortgage business and make a hefty profit if and when the turnaround occurs. With how cheap the mortgage options are today, there is plenty of room for a tidy profit in the long term, even if the short term is bleak. It is important to understand that you must play it safe, keep investments small, and set aside enough capital to buy as MBS make lower prices. By averaging in, you’re enjoying better prices and able to flow with the economic changes. Don’t lock yourself in now; let the market make a move before you make yours.