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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…