Kass: Subpar Subprime a Growing Problem

These items by Doug Kass were originally published on Feb. 8 on Street Insight. The original version contained an error that has been corrected. They are being republished as a bonus for TheStreet.com and RealMoney.com readers. For more information about subscribing to Street Insight, please click here.

Takeover Rumors Abound
2/8/2007 10:03 AM EST

Rumors of takeovers of OfficeMax (OMX) and Circuit City (CC) abound on trading desks today, which could explain the higher moves in the stock - OMX up about 5%, and CC up about 4%.

Fungus Among Us
2/8/2007 8:35 AM EST

Over the last several months I have been writing on Street Insight and talking on CNBC's "Kudlow & Co." about the ramifications of the developing implosion in the subprime mortgage market.

Last night there was more evidence: HSBC Holdings (HBC) and New Century Financial (NEW) -- two of the three largest subprime mortgage lenders in the U.S. -- reported disastrous credit losses stemming from their real estate origination businesses.

HSBC announced that its allowance for bad debts will rise to $10.6 billion (more than $1.75 billion above estimates) and New Century (whose stock fell nearly 20% on the news on Wednesday evening) projected a fourth-quarter loss and the need to restate its prior quarters because it materially understated subprime delinquencies and foreclosures.

Nationwide, the subprime default rate soared to 10.09% in November 2006 -- it stood at only 6.62% a year earlier). Despite a growing economy in early 2007, November's industry default rate exceeded the level of November 2001, which was recorded at the bottom of the last recession. However, the problem runs deeper than 5 1/2 years ago because nearly 15% of the mortgages made in 2006 were subprime. That is almost triple the penetration of subprime compared to 2000-01.