Worse Ideas and Mortgages

As most people all ready know, the majority of the adjustable rate mortgage (ARM) resets is going to hit in early 2008. It is likely that these resets will force all ready stretched homeowners into default.

In the late 1990's before CDO's were invented, a catastrophe like this could be avoided. This is because the loan originator and the borrower could renegotiate terms and find a payment plan that suited both of them. The borrower would keep their house and the lender wouldn't be stuck with a defunct mortgage.

With the advent of CDO's the borrower and the lender can not renegotiate. Even worse, some firm in Germany or France might own your mortgage. How could you renegotiate if you can not even speak the same language?

Most people do not understand that this is a bubble of the greatest proportions. During such famous bubbles as the "South Sea Bubble" and "Tulip Mania". All of these rich people used large portions of their money to speculate. During the current housing bubble the average person borrowed 8X-20X what they were worth and purchased a house. Some of these people (like most Americans) actually have a negative net worth because they are so shackled with debt. The housing monster has lost it's food source and it is now in collapse.

The newest victims are companies that most people did not even know existed. What did these companies do? They insured the toxic mortgages now being defaulted on. They are also starting to look a lot like the lenders did before they started going bankrupt. One of the best no brainer trades (besides being long gold) for the rest of the year is long term puts on these companies. If you can find shares to short, that is even better. Take a look at the charts. I don't see how these companies can survive.

Click on Image For Clearer Picture
(It's worth a look)

These charts are terrible. It wont be long until the bankruptcy rumors start swirling. These companies insured the mortgage originators during what will be one of the greatest financial busts in history.

Disclosure: I own puts on MTG and PMI . These are not to be viewed as trading recommendations. Trading in stock and options involves serious risk and should only be done by experienced traders.