Investments: Make a Killing from the Mortgage Fiasco

In big disasters, you'll find stock market opportunities. Say hello to investing in survivors of the mortgage fiasco.

You can point fingers at the subprime mortgage mess all day long, but leave room for taking advantage of the situation at the end of the day, as well.

Problems equal opportunities

It's no secret that our banks and mortgage lenders have taken a beating. It's karmic revenge for years of unhealthy lending practices, artificially inflated property values, and predatory attempts to lure consumers into mortgage deals that they couldn't afford. The blame must be shared among lenders and brokers who wanted to earn a quick buck, appraisers and auditors who turned a blind eye to glaring problems, and borrowers who really should have known better.

The whole scheme rested on the idea that homes and land would forever gain in value over time. When it became obvious that the truth was far from that ideal, the house of cards came tumbling down.

But a few cards are still standing. Survivors who stayed away from questionable business practices, or at least kept their exposure to bad loans to a minimum, will come out on the other side even stronger as the competition of yesteryear is done in by their own mistakes. Everyone should be learning a few valuable lessons from the subprime debacle.

Steps to profitability

When financial markets hit rock bottom, it's time to jump into the rubble and pick up some winners. Find the truly well run and responsible companies in the mortgage business, and make a mint when they show what they can do in good times. The discipline that saw them through the lean years should lead to massive profits in the future.

The first criterion to use to pick these investments is companies with limited damage from the subprime saga. That alone leads you to management teams with wholesome scruples and good business sense. Peruse balance sheets in search of the amount of charges taken to account for bad loans. Or scan the newspapers in search of the volume of negative news about the company. Another criterion is the amount of risky consumer business versus safer corporate lending accounts.

Whatever your yardstick, you'll measure up a few great businesses whose stocks and bonds have been dragged down by the general market malaise. Generous dividend yields are now common-just make sure that the company can afford to keep up the payments. Corporate bonds that once carried low investment yields, but offered ironclad safety, may have recently been downgraded to near junk. Certificates of deposit and treasury bonds can't hold a candle to the interest rates on high-quality mortgage bonds these days, as even the best of the best have gotten a bad rap.

Time to start searching

The actual bottom might still be a few months away, but this market is depressed enough that you can start picking through the trash today. Winners will win, regardless of economic conditions, and there are still plenty of them around.