Liquidity Scare

This sub-prime lender crisis is well underway. Countrywide (CFC) is undergoing serious issues and may go bankrupt. Capital One closed a large lending arm (Greenpoint). Many financial companies have tanked drastically. There are reasons to believe that things aren't as bad as the markets are making them out to be however. If the wider impact of these sub-prime issues turn out to be overblown, some potential companies to look into are:

• Thornburg Mortgage, Inc. (TMA) - Lender to wealthy, high quality Jumbo clients. Highly leveraged, but their loans are unlikely to default.
• Deerfield Capital Corp. (DFR)
• RAIT Financial Trust (RAS)
• Crystal River Capital, Inc. (CRZ)

All of these issues have high dividend rates, low P/E, and are valued well below their book value currently. Each hit a massive low in mid August -- down over 50% from June. If fears subside, some nice speculative gains may be possible.

A note on sub-prime: when mortgage rates (10-year bond + ~1.75%) hit a historic low in 2003, many borrowers over-leveraged themselves with very cheap 5-year ARMs or interest only loans. The low 2002 rates are beginning to expire, and while some borrowers were already paying 50-75% of income for their housing, they now cannot sustain the increased cost of their ARMs going to a variable rate. As these 5-year ARMs move from fixed to a variable rate tied to the Fed Funds Rate or LIBOR, which has risen by 2-3%, borrows are faced with paying hundreds of dollars a month more for their mortgage. With housing prices softening, more borrowers in such situations are going into foreclosure. This phenomenon is likely to continue into 2008 as the 2003 ARMs expire. Also, with the dollar weakening and inflation growing, there will be pressure for rates to go up over time. However it turns, this should be an interesting trend to follow.