This Mortgage Market Mess Can Be Traded

In this market mess, it's pretty clear who can't get mortgage money. At the top of the list is the "loan to value" crowd. These folks can't refi because home prices have fallen so far that they no longer have more than 20% equity in the property.

Once you hit that threshold, you either can't get new money or it's too expensive, as basis points are quickly added once you get above that point. These are the folks who are simply walking away from their properties once they get under water.

In addition, there is the unemployed crowd -- those likely in most need. They are absolutely out of luck as lenders now want almost up-to-the-second proof that someone is gainfully employed. Lose your job, lose your house. That's the new reality in LaLa land.

And pity the poor self-employed fool who needs a wheelbarrow to bring the required data of his or her company to the mortgage lender. Hey, didn't our system used to respect these entrepreneurs? Now they are second-class citizens unworthy of credit.

From a policy perspective, what is irksome here is that the government is throwing trillions in money and credit at the mortgage lenders -- taxpayer money I might add here. These lenders, in turn, are effectively rationing that credit in a way that's designed to maximize their spreads (and earnings). The perverse result, however, is to minimize the impact of the administration's policies on resolving the credit crisis.

In fact, that's why this policy fiasco is such a great trading opportunity. Essentially, we now have an oligopoly in the mortgage lending market dominated by four major players, two of which are really good buys and one of which is at least worth a flyer.