Kass: Finding the Next Shoe to Drop

Late yesterday, Countrywide Financial (CFC Quote), the largest originator of home loans in the U.S., reported a sharp rise in delinquencies in its prime mortgage loans.

At year-end 2006, Countrywide's subprime delinquencies were approaching 20%. That's nearly twice the rate reported by the subprime industry in November and it suggests that the upward spiral in subprime-industy late payments will rise dramatically in 2007. (New data from First American Loan Performance, a San Francisco-based research firm, confirmed this likely trend, reporting that nearly 14% of packaged subprime loans were delinquent.)

More importantly, these results confirm that credit problems will not be contained to the subprime mortgage market. At Countrywide, prime mortgage-lending delinquencies doubled to nearly 3% year over year, indicating that that sector is experiencing the same contagion that subprime experienced over the last 12 months.

On Tuesday, in response to the subprime carnage, Freddie Mac(FRE Quote) announced tougher subprime lending standards.

Today, the Federal Reserve and other regulators of banks are expected to release new subprime lending guidance, which will incorporate the impact of mortgage interest rate resets.

As a result of new lending standards and self-imposed reductions in mortgage lending, the availability of mortgages is going to be severely crimped -- and with it, personal consumption expenditures will soon take a dive.

It is no wonder that bullish commentators are getting bored with subprime lending problems. Larry Kudlow's hedgehogs, who, like Dante, Dostoevsky, Nietzsche and Proust, view the world through the lens of a single defining idea ("the greatest story never told"), are about to be outwitted by the foxes who, like Shakespeare, Aristotle, Balzac and Joyce, draw on a variety of experiences in creating their investment mosaic and refuse to believe that the world can be boiled down to a single idea.

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