iBooyah.com Investment Matters

As you might have heard, during the housing boom, the mortgage industry in its efforts to keep the housing buzz going engaged in very risky lending practices. These practices include lending to people with poor credit, called subprime loans. Subprime loan usually starts out with a low teaser rate, then adjust to a much higher interest rate after a year or so (the terms depends on the loan).

The problem arises when these rate adjust, resulting in payments beyond what customers can afford. In many cases, it has ended in foreclosure. In fact, one of the reasons we are seeing such as high foreclosure rates these days is directly linked to subprime loans. Unfortunately, CIT is a major player in this business. Although CIT has decided to wash their hands, the company must pay a price in the short term.

In our view, CIT’s decision to exit the business is a positive move. Take the hit now and move on.  In the short term, CIT shares will likely experience volatility as analyst weigh in on the impact this will have on the company’s future earning. For this reason, we believed the stock could go lower.

In the long term, we believed CIT is a solid company with recurring revenue stream.  The company will recover from this. Therefore, we view the current weakness in CIT shares as an opportunity to buy on the cheap. While it is a bit premature to jump in, the drop in CIT share is looking attractive. Our ideal entry price is around $45 per share.