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In yet another turnaround for holders of mortgage-backed securities, the Federal Reserve announced it will buy $600 billion in such assets.

Attempting to deal with the financial crisis, the Fed says it will purchase up to $100 billion in direct obligations from Fannie, Freddie, and the Federal Home Loan Banks.  Another $500 billion in mortgage-backed securities will round out the picture.

Firing all the ammunition would seem to be the general strategy, as the Fed combines this new initiative with additional incentives to unfreeze the consumer debt market — including $200 billion to security holders backed by various types of consumer loans.

Will this effort stave off the deepening recession?  Only time will tell.  In any case, it seems that investors in distressed assets can once again look to a powerful financial institution for backing.  This can only mean greater opportunity for those knowledgeable enough to take advantage of this latest move.

As reported in the Wall Street Journal, earlier this week, a residential-land company named LandCap Partners bought $40 million of distressed loans from Wachovia Bank. These loans, which were made to home developers in several different states, have a book value of approximately $80 million.

Wachovia’s incentive here is to remove these loans from its books and raise capital, and LandCap’s incentive is to sell the foreclosed property to different home builders.

Of the deal, Jefferey Gault, head of LandCap, says, “We get it off their balance sheet, and we take on the management duties. It’s the best of both worlds.”

Wachovia is offering up far more than those LandCap bought- roughly $350 million in distressed loans. Furthermore, its percentage of delinquent construction and land loans rose from 7.7 in the first quarter to 9.4 in the second quarter.

According to the research firm Zelman & Associates, U.S. banks may write off between $65-165 billion in bad construction and land asset loans over the next five years. As this trend continues, we’ll likely be covering this in numerous blog posts here

LandCap, in addition to other investment ventures, intends to buy more of these type of loans.

According to a recent article in The Wall Street Journal, banks and other financial institutions are acquiring foreclosed homes at a faster rate that they can sell them. Fannie Mae in particular purchased 44,071 homes during the first half of 2008, but has only sold 23,627. As of June 30, their balance of unsold homes was 54,173.

This bleak picture isn’t likely to change in the immediate future. Barclays Capital puts the tally of bank-owned American homes at 721,000, compared to just 112,000 two years ago! Furthermore, they expect an increase of 60% before the end of 2009.

As you can imagine, Fannie Mae and other financial institutions saddled with these foreclosed real-estate properties are very motivated, possibly even desperate, to sell them. Specifically, bulk purchases at very low prices, such as those we’ve chronicled elsewhere on this blog, are now being accepted, when in more robust economic times it’s unlikely they would even be considered.

As the saying goes, one man’s trash is another man’s treasure. The foreclosed accounts that U.S. banks are so eager to sell, even at less than 50% of the price such accounts were worth a few years ago, spell opportunity for saavy and motivated investment firms that specialize in management of distressed assets.

While this is bad news for many Americans, certain investors can eventually turn a profit by acquiring these foreclosed accounts in bottom-dollar bulk purchases, holding onto them until America’s real-estate crisis abates, and then selling them at top-dollar prices.

According to the New York Post, foreign investors have begun purchasing billions of dollars worth of foreclosed American real estate.  It’s not hard to see why. REO (real-estate owned) homes have fallen so drastically in value that they are worth anywhere from 31-80 cents on the dollar.

A foreign sovereign (state-owned) fund from Adu Dhabi is one such investor, and has begun investing in distressed U.S. real-estate assets.  With a reported $875 billion in assets, this fund has the resources to invest in and make a considerable profit from North America’s foreclosed homes.

Mark Hanson, a consultant for Field Check Group Mortgage, has been hired by an unnamed foreign sovereign fund to search for particularly good foreclosed home accounts.  He is narrowing his search to REO homes.  So far, he has secured an outstanding deal:  a $2 billion package of foreclosed American homes, at 31 cents on the dollar.

While these types of deals might still be unusual, they will become increasingly common as America’s financial market undergoes more bank failures and real-estate woes.

Enoch Lawrence, senior VP of CB Ricard Ellis, sums it up: “This type of bulk buy would make an impact on the market.  They (foreign sovereign funds) are in a unique position because they have a long time horizon to invest and a cheap cost of capital.  It’s actually a perfect time for them to acquire these REO assets.”

It’s not just foreign sovereign funds that stand to profit in this market.  If you read more of this blog, you will see notable examples of shrewd U.S. investors scoring audacious deals.  If you want to maximize your profits during this economic downturn, you’d be wise to consider working with like-minded investors.

In case there was any doubt, 2007 mortgages are in serious trouble. The Federal Deposit Insurance Corporation’s analysis, which ran in The Wall Street Journal, indicates that .91% of 2007 prime mortgages were “seriously delinquent” (i.e., in foreclosure or 90 days late) after a year, compared to just .33% in 2006. That’s almost a three-fold increase!

Freddie Mac reports much the same, with 1.38% of 2007 loans being delinquent, compared to .38% of 2006 loans.

According to Mark Zandi, chief economist for Moody’s Economy.com, “foreclosures will remain at record highs, the financial system will be under severe stress and the broader economy will sputter.” He goes on to say that more recent loans, those from 4th quarter 2007 and early 2008, seem to performing more successfully.

What this means for resourceful investors is that there are a disproportionate number of distressed 2007 mortgages littering the financial landscape right now. As we’ve already mentioned in this blog, the trading of distressed debt is increasingly popular on Wall Street, and an increasing number of investment companies are making a profit from this practice.

For those who are in a position to invest in these companies, now is the time to do so.

Call it hubris, or just plain denial, but according to Zillow’s Q2 Homeowner Confidence Survey, most U.S. homeowners consistently overestimate the value of their own homes, despite empirical evidence to the contrary.

Specifically, the survey found that 62% of U.S. homeowners think the value of their home has either increased or remained steady; but, in actuality, 77% of U.S. homeowners have suffered from declines in home values.

It’s tempting to dismiss this as other folks just needing a reality check, but the truth is that it’s human nature to dismiss numbers and statistics as affecting other people, and to discount the danger of abstract threats until they more or less smack us in the face.

What this means for the housing market is anyone’s guess.  Personally, I think it still has further to go in its downward spiral.  Not a cheery thought, but the Zillow survey indicates that many American homeowners seem to think it’s business as usual, for them at least.

When ugly reality hits some of these people, as it inevitably will, there are going to be some mortgages in trouble.  There are smart companies out there poised to make a profit by buying up these mortgages for a song.  Reselling them for a higher price once the current crisis passes will net these companies serious profits.

As an investor whose funds may be performing sluggishly, you should consider investing in companies that can maximize the potential profits from these distressed accounts.

Let’s be frank. Investors are all looking for the same thing- a solid return on their investment. In boom times you may have to choose between a relatively modest return on investment rather than a very strong one, but when times are tough, many investors have to take what they can get. These days many people are seeing their stock value decline, but feel like they cannot sell during a downswing because they’re afraid of taking the hit. People are wary of buying in that environment too because they aren’t sure what investments are on the rise.

The best advice? You should have at least part of your investment portfolio dedicated to companies that are likely to turn a profit even in a down period. The key is finding counter-cyclical growth.

There are a number of companies out there that fit that bill, but the ones that seem most promising in this market are the ones that can both make a profit during the downturn and see an even greater increase when the economy hits its stride again.

So what strategies work best in this economy?

Smart investors will look for the niches that benefit from the new marketplace. For instance, with all the talk about the mortgage crisis, a number of large banks are looking to get these mortgages off of their books. It’s in the banks’ best interest to clean up their balance sheets, and so they are willing to sell these assets at a lower rate than most people would guess.

The end result? Banks are now willing to get rid of assets like mortgages at dimes on the dollar. Smart companies (particularly those with the wealth management experience and knowledge to do proper analysis of the loans) can pick up performing loans at a low cost. And because the initial investment was relatively small, they only need a portion of the total number of mortgages to follow through in order to recoup their investment and see a strong return. Just think of what returns they can see when the economy becomes stronger and the rate of foreclosure returns to a normal level!

Another thing that people need to consider is that, even in the worst of the housing market troubles, when foreclosures reach a 6% rate on an investment that holds hundreds of mortgages, 94% of the loans are still performing! If you do the math, the return on investment is higher in this area than in almost any other area.

It seems incredible, but the secret is starting to get out. Take advantage of the economy, before it starts to take advantage of your investments…