Avoiding a Falling Knife in the U.S. Mortgage Market

"in February investors were spooked by the rise in early payment defaults on subprime mortgage loans. This type of default occurs when the borrower fails to make payment on a loan during the first 90 days after its origination. Rosner says the upswing in these early defaults may have marked the peak of poor lending standards but it certainly didn’t provide the high water mark for default rates or for trouble in the residential mortgage and MBS markets. Default rates typically peak 24 months after origination and, since the highest volume of mortgage origination came in early 2006 and late 2005, we won’t see the highest default rates until the second quarter of 2008. ... According to the Graham & Fisher analyst, people looking to make investments leveraged to the mortgage or housing market now could find themselves catching a falling knife."