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DesertCat, do you invest in subprime lenders and/or homebuilders? I think this is def. a good time to be buying with all the people predicting the apocalipse and all, everything is on 52week lows etc.

Where do you see the most value on these markets? I really trust your analysis

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I think there is some value in subprime, the problem is it's a lot of work to figure out where. I bought some DFC and made some nice profits and sold most of it before it replunged. I'm not going to buy it back until I do my homework on it in more detail now that I better understand these businesses.

The company I'm referring to in my first post is out of business and the market apparently thinks it's bloated corpse is worthless. It's been a great learning experience, I bought early before I really understood it and as it declined I've been constantly reresearching it and learning more.

Effectively what you need to understand is that most mortage/lending companies carry huge assets (securitizations) on their balance sheets that they don't own and huge liabilities are are totally non-recourse to them.

So you have to carve out a "pro forma" balance sheet of what they really own/owe. Then you look at the "stub value" of what cash they can reasonably get out of their securitizations. The securitizations are separate companies and you need to get their prospectuses and monthly reports to tease out how much cash flow they can generate and what collateral will be left over when it's closed. In some cases it's clearly nil, in some cases it's murky, and sometimes it's obvious that the parent company is going to get some cash.

Lots of work. But I think it's rewarding. I'm down $70,000 so far, but if I'm right I'll end up with a substantial profit by next year.

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I'm not sure what you mean by huge assets they don't own and liabilities that are non-recourse. If you mean term securitizations (as in most MBS/ABS transactions) that's not part of their book in any sense, except for three aspects - 1) They may or may not own residuals (equity tranche/first-loss position) and this may be what you're talking about in terms of the cash they can get. For most recent deals, the value of this will be close to zero. 2) The loans they sold into the securitization will have warranty for EPD (early payment default), fraud or other types of misrepresentation. This is a clear liability in this market. 3) They may or may not have retained servicing rights to the loans in the securitization (a fee for continuing to service the loans). This is another source of residual cashflow, though becoming less common for smaller shops.

All this is probably less of a concern (and easier to evaluate with reasonable amounts of disclosure) than loans in the pipeline that are held in a warehousing facility (which will generally be part of their book). Any serious mortgage market disruption can put the lender out of business because most of those credit facilities can be pulled on a moment's notice, in which case the lender won't have the luxury to wait to sell the loans into an appropriate securitization. In a liquidation scenario, you'll find that most lenders have very little value.