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....