Two Ways to Play Mortgage Lenders

Mortgage lenders have had a rough ride, and no doubt more tough times are ahead.

Housing sales and prices are down, interest rates are rising, and credit risk is growing. Some industry watchers expect prime mortgage rates to hit 7% by the end of the year, further depressing loan volumes across the board.

But whenever negativity is present, so is opportunity.

Indeed, hedge funds and other traders continue to eye mortgage lender stocks for profitable long and short ideas. And opportunity is plentiful for individual investors as well -- though they should tread carefully.

Although the subprime meltdown is already well under way, problems with Alt-A loans, or so-called "liars' mortgages," are only starting to rear their heads in the form of increasing delinquency rates.

Alt-A borrowers have higher average credit scores than subprime borrowers, but they usually lack the documentation typically needed for loans. In many cases, underwriting for these loans was sloppy, and the homebuyers were given more housing debt than they could actually afford.

Impac Mortgage Holdings(IMH) and IndyMac(IMB) are two lenders with considerable exposure to this market, but each offers a different compelling short-term trade.

Impac's Potential Boost

Impac is a small-cap mortgage real estate investment trust that acquires, originates and sells Alt-A mortgages. Most of the company's taxable income is derived from the mortgage assets it holds as investments.