This from Investment U:

The U.S. housing market is walking the plank. Easy credit helped usher in an unprecedented period of rising home prices. But now those same lax credit standards have us caught in one of the worst slumps in recent memory.

According to the latest data, the inventory of unsold homes sits at 4.23 million, representing a 10.2-month supply at the current sales pace. For comparison’s sake, that’s as many homes as Delaware, North Dakota, South Dakota, Alaska, Vermont and Wyoming have people.

In other words, an eager buyer these days is about as hard to find as a living dinosaur.

But before you abandon the beleaguered real estate sector altogether, you should know that opportunities for safe and steady profits do exist.

In fact, I’ve found a handful that may well be the most attractive investments – given the abysmal state of the markets right now – this side of the credit crunch…

Investments That Pay Stock Dividends Like Clockwork

These investments all pay handsome stock dividends like clockwork. And they avoid the volatility swings that now define the stock market, too. What an enviable tandem to have in your portfolio as we embark on what could be another tumultuous year for stocks.

Even better, when the market rights itself – and the inevitable real estate recovery occurs – you’ll be perfectly positioned for a nice pop in the stock price, as well. (That’s right: You’ll own shares that trade on major stock exchanges, not the properties themselves.)

So as the credit crunch bites off more market capitalization nearly every day (we’ve already witnessed $28 trillion in wealth disintegrate before our eyes), the following REIT (real estate investment trusts) has enjoyed a bulletproof status of sorts.

One REIT That Works In the Face of the Credit Crisis

Let’s take a look and examine exactly why this REIT is working in the face of the credit crisis.

First Trust/FIDAC Mortgage Income Fund (NYSE:FMY) invests exclusively in mortgages. The fund holds $100 million in mortgage-backed securities, the income from which allows it to pay a handsome 8% dividend yield.

Now I realize that your instincts may be to skip to the next article after reading “mortgage-backed securities,” but before you do, understand that the fund didn’t lose a penny in 2008 and raised its dividend three times.

To understand how it pulled off this feat, you first have to know a little bit about the market for the securities the fund owns.

You see, the problem with mortgage-backed securities is that once it was discovered that many were backed by bad subprime mortgages, the market for trading them froze up. Thus, trading for the worst securities went “no bid,” which means there were no offers to buy. Using mark-to-market accounting methods, holders were forced to write down values to zero.

But First Trust’s net asset value declined only about 15% over the course of the year, which means the mortgage bonds it holds are the few still being actively traded through this credit crisis.

Dividend aside, there’s a capital appreciation component here, too.

When the day comes where mortgage-backed securities are in favor again (and it will happen), this fund’s share price will surge. So look past the bad apples and focus on the bulletproof.

Source: Bulletproof REIT Bargains: How to Profit From the Inevitable Real Estate Recovery

Nor is it much of a surprise: Since the subprime crisis broke last year, we’ve repeatedly predicted the fallout would spread to such other markets as credit cards and even auto loans.

Citigroup Inc. (C), the third largest lender to Visa Inc. (V) and MasterCard Inc. (MA), said that the states hit hardest by the subprime fiasco – Arizona, California, Florida, Illinois and Michigan – experienced mushrooming levels of credit card delinquencies and defaults in the fourth quarter. In fact, those states accounted for two-thirds of the nation’s total credit card losses.

Evidence suggests that as adjustable rate mortgages (ARMs) reset to higher interest rates, consumers in these regions – and across the country – are relying more on their credit cards to finance such day-to-day living expenses as groceries and gasoline.

That’s not good.

If you don’t believe us, just ask the U.S. Federal Reserve. On the news that credit-card debt rose by $5.5 billion, or 7.1%, in January to $947.4 billion – dwarfing the 2.9% gain in December – the central bank announced that it’s conducting a formal review of the industry so that it can “better assess the current state of the credit card market.”

Like the subprime mess, as lending standards loosened on the heels of the 2001 mini-recession, consumer credit was extended beyond its viable limits. Credit-card issuers teased would-be clients – with marginal credit histories – with bargain-basement introductory interest rates, only to sock them with a much higher rate a few months later.

And now that the higher rates have kicked-in – and on nice, fat balances, too – people are struggling to keep up with their bills under the strain of an economic downturn.
Analysts widely expect the situation will get worse before it gets better. And they’re likely right. But this credit-card fiasco probably won’t have the cataclysmic, far-reaching effects that defined the subprime debacle. As a result, there are opportunities to profit.

Maxing Out on Credit

The credit crunch was, of course, sparked by high levels of defaults on subprime mortgages extended to people with shaky credit histories. And because banks pool mortgages together and sell them as investment vehicles – called mortgage-backed securities (MBS) – investors were left holding worthless paper (and massive losses) when the mortgages went belly up.

Consequently, the credit markets dried up as financial institutions – reluctant to take on any more mortgage-backed securities – became leery of lending to one another.

The carnage is already well documented, highlighted by the fall of the venerable Wall Street giant The Bear Stearns Cos. Inc. (BSC). Banks already have been forced to write off billions in losses. Now they’re scrambling to bulk up their cash reserves to protect against credit card-related losses.

As of December, Americans had $944 billion in total revolving debt, most of it on credit cards, an annualized increase of 2.7% on a seasonally adjusted basis, The Wall Street Journal reported. That rate was 13.7% in November and 11.1% in October.

The bottom line: Americans have dramatically curtailed their credit card spending.

Now you could blame the consumers’ reluctance to pull out the plastic on the slowdown of the U.S. economy, and you’d be right. But just partly. The other, more ominous reason is the likelihood that many consumers are simply maxed-out on credit.

In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default altogether, according to research by the RiskMetrics Group.

The slowdown in consumer credit could well run through the rest of the year. But let’s not go and sound the alarm bells just yet. Although the lower numbers will have some effect on the bottom lines of both regional banks and Wall Street behemoths, like Citigroup and Bank of America Corp. (BAC), shares have already been pummeled and investor sentiment has likely bottomed out.

What’s more, a key difference exists between mortgage debt and credit card debt that will, in effect, cap the amount of damage credit card defaults can do.

Subprime All Over Again? Not Likely

According to the Fed, credit-card delinquency rates are now up by more than a full percentage point since bottoming out in the fourth quarter of 2005, marking the abrupt slowdown in consumers’ credit-card spending habits.

But the silver lining is that credit card debt is not securitized – pooled – and then sold off by banks as investment securities on any kind of scale that rivals mortgages. And that fact undermines any notion that banks may have subprime-like write-downs in their futures.

Remember, it wasn’t just the loose lending of mortgages by banks that got us into the subprime mess. It was every bit as much the over-speculation on mortgage-related investment securities, too. The latter can’t happen with credit card debt.

In a note to clients, CIBC World Markets Inc. (CM) Economist Meny Grauman wrote that “the good news in all of this is that both corporate and consumer loans are typically not securitized to anywhere near the degree that mortgages are. This means that even though losses on these assets still have the potential to weigh on financial sector earnings, they will not create the same broad systematic risks created by recent troubles in the asset-backed securities market.”

What’s more, a recent report published by the Federal Deposit Insurance Corp. (FDIC) said that 99% of insured institutions were currently well-capitalized at the end of 2007 and close to 90% of those were also profitable, despite the fact that profits at banks ­- thanks to the subprime meltdown – fell to 16-year lows in the fourth quarter last year.

Taking it to the Banks

The recent data from the FDIC clearly demonstrates how well capitalized U.S. banks are and indicates these financial institutions should be able to ride out any approaching storm. Accordingly, we’re reiterating our bullish view on the financial sector.

In an interview with MarketWatch, Andrew Gray, a representative for the FDIC, said that with only 76 banks on the FDIC’s “watch list,” problem banks are at historically low levels, despite the chaos of the last several months.

“Our problem bank list has 76 institutions, low by historical standards,” Gray said. “In 1990, there were close to 1,500 on the list.”

Five banks have failed in the last 12 months: Metropolitan Savings in Pittsburgh; Douglass National Bank in Kansas City, Mo., Miami Valley Bank in Lakeview, Ohio; NetBank in Alpharetta, Ga.; and Hume Bank in Hume, Mo. That’s a low number when you consider that over 800 banks failed during the savings-and-loan (S&L) crisis that occurred between 1990 and 1992.

“The industry as a whole is coming off a golden period of record profits,” FDIC Chairwoman Sheila C. Bair said in the agency’s Quarterly Banking Profile. “Because of this financial strength, the overwhelming majority of banks and thrifts remain well-capitalized and profitable.”

Consequently, many of the big banks are great plays at the current valuations. But rather than locking in on one target, it makes more sense – considering the prevailing market jitters – to buy shares of the Financial Select Sector SPDR (XLF). In this one ETF, you get exposure to the entire financial sector, which protects your investment against the potential for any blow-ups at individual financial institutions.

But if you insist on trying to “catch lightning in a bottle” with a single pick from the group, Goldman Sachs Group Inc. (GS) is a stellar option. Goldman is well run, well capitalized and is very liquid. The company’s return on equity (ROE) in the fourth quarter remained a stout 40%. And in a recent report to analysts, the firm said that its pool of liquidity was $80 billion, compared with an average of $60 billion during the fourth quarter. And one cannot underestimate the value of cash when investing during such an unnerving time.

After all, as the old Wall Street adage holds: “Cash is king.”

[Editor’s Note: Robert Williams, a veteran commodities trader, is the Editorial Director for The Oxford Club, and is a regular contributor to Money Morning. He last wrote about alternative energy investments. For information on an Oxford membership, please click here.]