"Even after the recent bump in long-term yields, they remain too low to meet most investors' needs," says Marvin Appel.

The editor of Systems & Forecasts explains, "The iShares NAREIT Mortgage Plus Capped Index ETF (REM) appears to be a good solution for those seeking income in 2011; its current SEC yield exceeds 10%.

"About 2/3 of its holdings are mortgage REITs, which are companies that borrow at short-term rates and use the proceeds to buy mortgage-backed securities.

"Capstead Mortgage (CMO) borrows for the short term at low cost -- rolling loans among a handful of big banks -- while lending money for the long term at a higher rate," says Andy Obermueller.

The editor of Government-Driven Investing -- which finds stocks positioned to benefit from changes in government policies and regulations -- explains, "Capstead, organized as a real-estate investment trust, keeps the spread for its troubles, and pays out 95% of its net earnings to shareholders. The result is a good defensive stock to help protect your portfolio.

"One of the things the government did to make sure that the housing market didn't crater even more than it had was to step in and guarantee certain mortgages. If the borrower defaulted, Uncle Sam would step in, like a co-signer, and make good on the loan.

"The U.S. government backstopping the majority of American home mortgages. The government guarantees bankers and investors won't be at risk. It does this by buying mortgages from banks. It's a dumb deal for the government, but a brilliant deal for the banks and investors. And it means we can collect 17% interest, safely.

This post is part of a special report, Top Picks for 2010, the 27th annual survey in which TheStockAdvisors.com asks the nation's leading advisors for their single favorite stock for the new year. See all 80 stocks listed here.

"Annaly Mortgage Management (NLY) is our favorite investment idea for 2010," says Jack Adamo.

In his Insiders Plus newsletter, he explains, "The company buys only Ginnie Mae, Fannie Mae and Freddie Mac bonds, all of which now have explicit U.S. government guarantees."

For speculators, Martin Weiss has uncovered a stock that benefits from rising home foreclosures. In the higher risk section of his The Safe Money Report he looks at Lender Processing Services (NYSE: LPS).

"We have a new speculative pick: Lender Processing Services. This company was spun off from Fidelity National Information Services a couple of months ago.

"It is the biggest outsourcing firm in the business of processing home loan defaults and foreclosures.

"As you might imagine, that business is booming due to the massive flood of troubled mortgages -- revenues in the company's default services unit soared 90% to $197.2 million in the second quarter from a year earlier.

"LPS also has a division that helps investors, banks and other clients model prepayments, defaults and other characteristics of mortgage-related securities.

"With everyone trying to figureout the value of all the troubled paper out there, the demand for those services should also ramp up. We emphasize, however, that this is a speculative play."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.

Bloomberg News reports that Bank of America Corporation (NYSE: BAC) thinks that mortgages have further to fall. And Bank of America names specific companies which it believes will be damaged the most.

The bank believes that mortgage losses so far are "the tip of the iceberg." That's due to the enormous volume of variable rate mortgages scheduled to reset in the next couple years -- specifically $515 billion in 2007 and another $680 billion worth in 2008. If that's not bad enough, interest payments on about $900 billion of the riskiest subprime home loans are due to increase in 2007 and 2008.

I've been posting about real estate problems since last October. But Bank of America seems to think that two of the stocks most exposed to the mortgage mayhem have further to fall because they hold mortgages themselves as well as selling them on to investors and may not have set aside enough money to cover losses. These two:

• IndyMac Bancorp (NYSE: IMB) looks cheap. Its Price Earnings to Growth (PEG) ratio of 0.2 -- based on a P/E of 7.4 and earnings growth of 35% to $3.97 in 2008 -- makes it look extremely cheap to me unless the analysts who track IndyMac are way off the mark.
• Countrywide Financial Corp. (NYSE: CFC) looks cheap. Its PEG ratio of 0.5 -- based on a P/E of 9.7 and earnings growth of 19% to $4.55 in 2008 -- makes it look inexpensive to me unless the analysts who track Countrywide are way off the mark.

What investors need to figure out is whether their current stock prices reflect all the bad news or whether things will get still worse. I'd be inclined to think that the bad news is reflected in the stocks already and Bank of America is wrong about these two stocks. What do you think?

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post