While we haven’t had the exotic mortgages here, we do have a different bubble. With the government here promoting “state” housing via property investors, there are tax benefits for negative gearing of rental property. There has been an over supply of money via the influx of capital from the Pacific nations due to the absence of capital gains tax on property.

This has prompted the banks to allow people to purchase investment properties by pyramiding the negative gearing and interest only loans. They have also loaned people more than the purchase price on property (sound familiar?) allowing people to use the accrued equity gains to finance the shortfall of the rent and tax rebates. In my opinion this has created a potential Domino effect where people may find themselves on the wrong side of the equation should property values not appreciate or heaven forbid, decline!

As I write this, values have topped and look poised for a correction, despite the cries of “Property always appreciates in the long run” and “This time its different”. I am sitting here watching the events play out in the USA and wondering what could happen here if the financial cancer manages to travel all around the globe.

Keep up the good work as you provide a wonderful insight to the potential market direction. I am sitting here with my cash looking for the bargains that I know are bound to appear one day.

WaMu is down 16 percent for the day
CFC is down 7 percent
NFI is down 5 percent

And the bigger news is Fannie Mae is nearly down 10 percent. Another big issue that we will be seeing in the next few months is in the process of foreclosure, everything is opened and we can see what dirt was swept under the rug. So far what we are seeing is not good.

In addition to the mortgage lenders, and the hedge funds based on these poison loans, we have to be prepared for the collapse of some the mortgage insurance companies, and some municipalities who spent based on the mythical home values.

I also heard that a number of non-financial related companies are also in trouble, not because they engaged in bad loans themselves, but because they invested in the poison funds. I can’t remember the company, but there was a well-known mid-size company who invested ALL of their profits in these funds, and have lost nearly all.

As I (and many) have said: House values are a myth. Stock prices are a myth. The “Value” of a house, a stock, or the prostitute on the street corner is determined by the amount of CASH a person hands over when they buy it.

Even though it’s surely doom and gloom for anyone involved in the mortgage and financial industries, there are still companies out there who refused to buy into the pipe dream. These are the companies who will survive, and possibly thrive in these troubling times.

For example, Prudential (PRU). I think they have already written off what little exposure they had in the subprime market. Their stock price suffered about 1%, but they’ve held most of their value because they have historically been a very conservative company.

Another indicator: While some companies are in the news for robbing their pension funds to pay off bad debt or operating expenses, the PRU retirement fund is fully funded, in cash. In fact, it was over-funded by $1 billion, so they used that money for retiree health care.

(Disclosure: I am a stockholder of PRU, and PRU paid for my college education)