Pair trade: Going long bankruptcy and short housing

While the overall numbers of those American homeowners whose homes are getting foreclosed may be around -- to use Jim Cramer's statistic -- 1 in 550, I have to assume there are a lot more people getting closer to this point. When incomes are somewhat stagnant and housing prices are down, a lot of us can no longer tap our house to access more money. So what happens in a worst case scenario?

Bankruptcy seems to be a viable option for more and more Americans. In Arming against foreclosure, MarketWatch examines measures being taken at the legislative level to help Americans ward off foreclosure. One interesting proposal mentioned is one "that consumer advocates see as key to helping more people stay in their homes: allowing bankruptcy courts to modify troubled mortgages on primary residences."

Currently, bankruptcy law cannot enact measure to modify the mortgage on a primary residence, forcing homeowners to find different solutions to keep their homes. Consumer advocates are pushing for new measures to allow for bankruptcy law to act as an "efficient and established method for troubled homeowners to make good" on their debts, particularly their mortgages.

For a lot of people, declaring bankruptcy and leaving their homes may make financial sense if the debts on the home now exceed the value of the home. In this case, homeowners would be going long bankruptcy and short the housing market.

It's a tough trade.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.