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Mortgage Issuer Immune to Doom and Gloom

04/11/2007 12:00 am EST


Neil George

Editor, Profitable Investing

Neil George, editor of Personal Finance, thinks the despair about sub-prime mortgage defaults is way overdone and he recommends a mortgage company that’s managed to keep its head above water.

We have some delinquencies in mortgages extended to less-than-stellar credit risks. As a result, the sky is falling and the US economy is doomed. It isn’t, though. This is bad for a collection of companies, but it won’t bring down the entire market.

First, let’s look at the sub-prime market. The bulk of sub-prime mortgages (about 60%) are part of only ten financial companies. We don’t own a single one of them and don’t plan to. Even if these went belly up, along with the rest of the small fry, that’s only $200 billion worth of mortgages out of nearly $9 trillion—a small fraction.

Although folks are in a tizzy over delinquencies and defaults, the mortgage market—including sub-prime—is running at 0.5% on a 90-day trailing basis. That’s low by normal standards. The headlines may say that sub-prime default rates are soaring, but the reality is that fourth-quarter rates were around 4.9%, up from 4.7% for the same quarter a year ago.

We’ll see some resolution to defaulted mortgages (i.e., foreclosures). But out of the $17 trillion worth of US housing, most [experts] see only about a million of those homes go through the [foreclosure] process.

The sub-prime chatter has been weighing on the stock and bond market. We’ve seen this before and will see it again. However, we’ve had two plans that serve us well.

First is to know the difference between a stock and a company. We don’t have a problem with the companies or their markets, only with the short-term stock price movements.

Take Thornburg Mortgage (NYSE:TMA). This stock is beaten up whenever the mortgage market has bad news or when folks start whining about interest rates. Yet, it’s not about what kind of a loan or bond portfolio you run, only that you’re good at running it.

Even if you operate in the lower end of the credit spectrum (Thornburg doesn’t), you can run a successful operation if you proactively deal with market and credit risks. If you don’t, you pay. Despite the meltdown in a handful of its poorly run peers, Thornburg is flat for the year so far. That’s impressive, given all the hype from the doom and gloomers.

Second is to buy when the stock price of a solid company is down. Thornburg is a prime example. With the price decline recently, the stock is a buy, even more so given Thornburg’s and its mortgage portfolio’s quality. (It traded around $26 late Tuesday--Editor.) That’s what top management is doing, too. It’s been filing to buy hundreds of thousands of shares with its own cash. That’s what we continue to recommend. Buy Thornburg Mortgage up to $31.25.

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