What Not to Buy: Mortgage Stocks

March 10, 2007 No Comments »

A month after Wall Street battered subprime mortgage companies and the sector as a whole, some investors are beginning at look for bargains at the beleaguered companies who have managed to stay afloat.

But the problems we’re seeing are merely the tip of the iceberg in an industry full of mortgage fraud, predatory lending, mismanaged accounting practices, buybacks, defaults, and falling property values.

In the past five years, mortgage companies could hedge their bets on rising property values, but as the housing market cools, stagnant or dropping prices no longer offer any protection to lenders and borrowers.

It used to be that borrowers who couldn’t make their monthly mortgage payments would simply refinance to a negative amortization program (option arm) that lowered payments significantly, betting on appreciation to make up the difference.

Things have changed. With little growth, borrowers who are having difficulty making payments are now faced with mortgage lates, defaults, and possible foreclosures.

While this will force many borrowers out of their homes, it will also greatly impact the banks and lenders who offered these risky loans in the first place.

I think we are just beginning to see the ugly face of an industry that was been known as one of the most fraudulent of all sectors in the economy.

While it is true that banks and lenders are hedging their bets by withdrawing risky loan programs and tightening underwriting guidelines, the sheer portfolio of buybacks and defaults may be enough to sink even the largest mortgage companies.

While many of the mortgage lenders sport price-to-earning ratios in the low single-digits, they do so for a reason, and now is likely not the time to invest as more bad news is quite likely to follow in the near-term.

If you’re looking for bargains that’s fine. But those bargains will likely be around in another year as well, at even better prices.

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