How to Profit from Historically Low Prices Birmingham AL

Aftermath from the real estate bubble has resulted in a severe decline in the value of mortgage-based securities, and current market conditions indicate that now is a good time to invest in certain mortgage-backed securities. Although purchasing these securities is not without risk, with the recovery of the residential housing market, and most of the weakest mortgages already through the bankruptcy process, some analysts believe that mortgage securities could increase sharply in 2010. See the following article from Money Morning for more on this.


Recently, I finished reading an engaging book that explained in detail how John Paulson generated more than $20 billion betting on a crash in the housing markets. Many wise investors could see the writing on the wall months ahead of the panic period, but since you can't exactly short an individual house, it was difficult to figure out the best way to profit from the coming crash.

After months of studying and more than one false start, Paulson eventually determined that the best strategy was to buy protection on mortgage securities. I'll spare you the tedious details, but the concept of mortgage securities is very interesting (and potentially very lucrative). Essentially, many of the loan originators - the companies actually lending money for home purchases - didn't want to keep these loans on their books. Instead, they bundled the loans together in a pool and sold these "securitized" loans to investors.

Over time, the process got very complicated, with the pools being sliced up into different categories - some with more risk and potentially greater returns, and some with much lower risk and consequently lower profits. Leading up to 2007, there was so much investor demand for these securities that the loan originators couldn't keep up with all the buyers. Eventually, new derivative markets emerged, allowing more investors to bet on these pools of mortgages.

When housing prices started to decline, trouble hit these mortgage-backed securities (MBS) and the risky sections started taking on losses. Like a vicious disease, the losses quickly spread up the line, ultimately causing losses in even the most conservative securities. Major banks and brokerage firms who owned billions of dollars' worth of these toxic assets were in deep trouble because they had borrowed huge sums to buy mortgage investments that were now worth pennies on the dollar.

The devastation in mortgage investments has had a huge impact on investment psychology. Investors from Park Avenue to Main Street are still shell-shocked by the devastation and many are blind to see opportunities developing in some specific mortgage investments.

A Tale of Two Risk Levels

Unemployment, falling property values and weak consumer sentiment have pushed residential mortgage securities down to historically low prices. In many cases, residential mortgage securities are being held at 20 or 30 cents on the dollar, even...

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