S.O.S. Sorting Out Subprime

Does distress in the housing market spell lasting trouble or has it created prime opportunities to put your money to work?

a contagion effect,” explains Bruce Goode, president of Cleveland-based Goode Investment Management, noting that its impact was felt across the entire fixed-income market. He maintains, however, that there are solid investment opportunities. Goode advises investors to stick with quality–buy high-quality AAA or AA rated bonds that have been beaten up. (To understand how your portfolio may have been impacted, see “Mortgage Mess,” Moneywise, this issue).

For Jason Tyler, a senior vice president with Ariel Capital Management L.L.C. in Chicago (No. 2 on the be asset managers list with $16.1 billion in assets under management), it’s precisely the companies that issue credit ratings that he believes present an opportunity for contrarian investors. “People are starting to point fingers at the bond rating agencies, saying they should have predicted the subprime meltdown,” he says.

While threats of litigation circle around Moody’s Corp. and Standard & Poor’s, a unit of The McGraw-Hill Cos., Tyler points out that they’ve faced litigation risk before and that long-term investors may want to take a look. Noting Moody’s particularly strong franchise and market share, he believes its shares present a “great opportunity” for investors who can remain patient over the next several months during which the stock may take a few more knocks. In mid-September, shares of Moody’s Corp. were trading at $44.38, down 39% from $72.44 at the end of May.

Tyler’s colleague, Matt Sauer, senior vice president and co-portfolio manager of the Ariel Appreciation fund (CAAPX), says that in the current environment, shares of Illinois Tool Works (ITW) look attractive. Based in Glenview, Illinois, the company makes metal and plastic fasteners, food service and welding equipment, and other products. Because the company is very diverse with respect to its products and customers, as well as geographically, Sauer feels it has the ability to weather different economic cycles. In mid-September shares were trading at $56.83, up 24% for the year.

Still Water
As investors look for market stability and scrutinize whether the recent interest rate cut will quell the likelihood of a recession, experts caution that it would be detrimental for regulators to swing from one extreme to the other. While the growth of the subprime mortgage market initially benefited many black homeowners, increased regulation may limit the African American community’s entrée into homeownership and the wealth building opportunity that it provides.

As a prime example, Brimmer notes the risk in assuming many subprime borrowers were somehow tricked into their loans. While it’s true that many mortgage lenders vigorously promoted their loans, he says there was a demand for housing among low-income borrowers that was simply met by the marketplace. It’s a sentiment that underscores the challenge the NAACP faces in its pending lawsuit against a dozen subprime lenders alleging “institutionalized systematic racism.” Brimmer cautions that increased regulation to control predatory lending may have the side effect of pricing many African Americans out of the housing market.

Back in California, as Teer looks ahead, he says above all else, there’s no need for homeowners to panic. Those who don’t have to sell

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