This market is so difficult right now trying to balance the reality of what is happening on Main Street with the current and future political interference into free markets. Some of the news out of the real economy is really scary - I had mentioned last August when "subprime" was the big issue that the mortgage issues will climb the food chain, into Alt A loans and then finally into prime. Subprime is just a convenient label and the weakest credit risks, so they would be the first to go. But not the only - as was conventional wisdom back then i.e. "those darn subprime people are the cause of all this - they never should of had a house in the first place". It is so much bigger than that - a truly stressed consumer up and down the food chain.
However. how do I balance this (correct) thesis against the potential for some arm of the government to step in by summer and literally buy up toxic mortgage paper directly? This is the conundrum and why this market is even harder than it appears. If the free markets were allowed to reign I would have one very clear strategy but with all the King's Horses (and Men)
working to interfere it clouds things up. Here is some "reality" of just how quickly the vintages of Alt A mortgages from 2005-2007 (the worst era of reckless lending) are degrading. Keep in mind these are sequential increases, meaning one month over another - the pace is incredible - 2006 and 2007 are just horror shows. Frankly, it is degrading more quickly than even I thought. (Is this anywhere in the mainstream financial press or are we too busy high fiving the fact we are going to overload Fannie and Freddie with mortgages?)
Folks what this means is 2007 paper in the Alt A arena (that includes the whole year including Q4 2007 which is not even half a year old), is already delinquent to the tune of 1 in 10 mortgages! The oldest mortgages in this group are .75 years to 1.25 year old. And already a 10% failure rate. Scary. Scary. Scary.
BUT what do you do when the government will eventually be buying all this paper. (since it is such a bargain and it is only trading low due to inefficient markets not that its purely junk Research new investment ideas Reduce risk
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