With the subprime lenders going bankrupt, mortgage insurance companies under capitalized, foreclosures climbing every month, and big lenders loan volume drying up, the easy way to make $1,000,000 in the next 2 years is to short mortgage related stocks.

For those of you how don't know what "shorting" a stock entails it's simply "buy low, sell high" in reverse order.  We are simply "selling high" by locking in our sales price today, watching it fall, and "buying low" in the future at the lower price, pocketing the spread.  It's called "selling short" or just "shorting".  I know the name is confusing.

Only about 18% of investors ever sell short.  It's just not in people's nature to be that negative I guess.  Or maybe it's that old adage, "You don't kick a man when he's down".  But a company is not a man.  So don't feel bad betting against this sector, especially some of these money grubbing lenders, insurance companies, etc, who made fortunes over the last 2 decades. 

So kick away!

Some of these subprime lenders are Accredited, Novastar, and New Century etc.  Subprime lenders are dropping like flies.  ResMae and Ownit Mortgage just filed bankruptcy.  New Century just lost 40% of it's stock price last week when they announced some "accounting errors" that overstated income.  Now stockholders are suing.  That can't be good for the stock price.

The whole mortgage related sector will experience the same...it's just a matter of time.

I use a leveraged way to control more stock using a long term option called a LEAPS.  It gives me 3 years to ride the stocks down the drain and I can control 10 times more shares than if I bought the stocks themselves.  This leverage allows me to earn much higher returns...the same leverage that allows a real estate investor to control a $100,000 rental house with only $10,000 down. 

The problem with the subprime lenders is they are too smart to allow LEAPS trading on their stock.  LEAPS have only been around since 1997, and only 1100 companies allow their stock to be traded as LEAPS). 

So we are left with other mortgage companies and industry related companies like mortgage insurances companies.  Many of the mortgage insurance companies are on the hook for subprime loans above 80% LTV and when those loans go into foreclosure...they have to pay.  Insurance companies go under doing that and our mortgage insurance companies are severely under capitalized.  Mortgage insurance company examples are Radian, PMI, MGIC, FNMA, Freddie Mac.

See below a small position portfolio I set up to do just that back in the fall of 2006 which each position represents a one contract (controlling 100 shares) of Countrywide (CFC), Freddie Mac (FRE), Fannie Mae (FNM), and Thornburg Mortgage (TMA). The second column shows what the option is trading at now, the next what price I started with, next my profit so far, and lastly the Annualized Rate of Return if my current return held steady for a year. 

First you can see the leverage using the option to control 100 shares of $40 stock for 4.12 (CFC on the chart...my cost 4.12 x 100) for $412 instead of the $4000 it would take to buy Countrywide stock out right.  Or if I'd invested $4120 in options, I'd control 1000 shares of Countrywide instead of 100 buying the shares outright. I'd have a profit of $1777 instead of $177.  Either way though I'm earning 72.77% annually on that top trade in Countrywide and a whopping 92.87% in Thornburg Mortgage.

And remember as the outlook gets worse for these companies and the sector they belong too, these positions will improve.  Try getting those returns from your mutual fund!!

If a person started with about $40K, got an 80% return, reinvested the profits, they'd have a $1,000,000 in about 4.5 years!!!

Maybe this could be a way for folks could make up for under funded retirement accounts, or a way to make for a loss of some home equity as prices fall over the next few years....a hedge if you will on home prices.

This could also be a replacement strategy of real estate investor as they wait for the bottom in a few years and when the bottom materialized, they'd have a lot more cash with which to pick up the bargains!

With that strategy, now I've showed you how to make not $1,000,000, but $2,000,000 the easy way.

How's that for "under promising" and "over delivering"!

Rob K. Blake,
The Mortgage Insider