The subprime mortgage business is collapsing.

The Mortgage Lender Implode-O-Meter is now up to 16 companies that have either failed or withdrawn from the business in the last month or so. The ABX indexes continue their plunge, showing that credit conditions for subprime borrowers are deteriorating on a daily basis. The cost of credit insurance for these loans is now so high that the secondary market, where lenders have been selling the loans, is no longer economically viable for the lenders. The New York Times has picked up on this story, with a piece entitled “Tremors at the Door“. The scary graphic on the left, showing the skyrocketing early default rate, is from that article. Some of this is credit issues - people would pay if they could, but can’t - but a great deal is just plain fraud, in my view. The Mortgage Fraud Blog has lots of good information, including links to the complaints in civil lawsuits that spell out the details of the now-standard cashback fraud.

In any event, the net effect is that credit is becoming much harder to get for the subprime (typically, a FICO score less than 680 will be counted as subprime). This means that the bottom-of-the-barrel buyers that have supported the lower end of the housing ladder are rapidly being eliminated. Clearly this will ripple up the ladder.

However, the homebuilder companies’ shares continue to be recommended and bought, despite the gloomy warnings from the homebuilders.

Here is an amusingly annotated transcript of analyst questioning of an executive from one of the major homebuilders (D.R. Horton). The analyst is desperately searching for support for his position, rather than gathering information. Classic.

The rumor that B of A was buying Countrywide blew me out of my CFC puts today. Annoyed, I sold my MTG and COF puts as well. Now I’m just in indices. Too many of the individual stocks have been subject to short squeezes for me to want to play that game anymore. The indices are a different matter. This week showed some weakness and the shorts are starting to look better.