A mortgage REIT has earnings results out. "Mortgage lender Aames Investment Corp. on Monday said its losses narrowed in the fourth quarter. The company said it raised rates on production during the quarter, a trend that is continuing into the first quarter."

"Cutting costs in reaction to a tough mortgage market, Los Angeles-based sub-prime lender Aames Investment Corp. said Monday that it would close offices in Deerfield, Fla., and Parsippany, N.J., and eliminate 100 jobs in its wholesale lending division. Aames is a specialist in higher-cost loans to borrowers with imperfect credit."

CNN Money reports on lending trends. "Millions of mortgage borrowers are entering their 'danger years,' when delinquencies peak and owners risk losing their homes. Delinquencies have historically reached their highest points during the third and fourth years of mortgages, according to Doug Duncan, chief economist for the Mortgage Bankers Association."

"The number of Americans affected by the coming danger years could be huge. Half of all mortgage loans are three years old or less, according to the MBA. Nearly $3 trillion in mortgages originated in 2002, $4 trillion in 2003 and $3 trillion again in 2004."

"In addition, many of these transactions involved risky loans, such as interest-only ARMs and no-down payment loans. A recent report from the NAR found that the median new home buyer put down just 2 percent in 2005. Forty-three percent put down no money at all. And according to SMR Research, some 25 percent of loans were interest-only, do nothing to reduce the debt on the house."

"'People are really stretched,' says Dean Baker, macroeconomist for the Center for Economic and Policy Research. 'They're betting that the housing market will continue to appreciate. The problem is that few people recognize it for the gamble that it is,' says Baker."

And Danielle DiMartino continues her series on systemic risk. "For many people, the concept of systemic risk has never been experienced outside a textbook. But many financial experts worry we're closer than ever to experiencing it, thanks to stresses on the ubiquitous mortgage market."

"Lately, lax mortgage lenders have all but maximized the potential for systemic risk. Encouragingly, regulators are finally stepping in. 'Regulators are obviously very concerned,' said Paul Kasriel, chief economist at Northern Trust Co. 'They've issued guidelines with regard to home-equity lending and are working on guidelines for nontraditional mortgages.'"

"Mr. Kasriel said he's been concerned for some time that banks had too many chips on one bet. 'U.S. commercial banks have a record exposure to the mortgage market,' he said."

"When you add mortgages they hold on their balance sheets, you get to mortgage-related assets making up a record 62 percent of commercial banks' earning assets. As recently as 1985, banks' holdings were south of 30 percent. We're talking about a huge bet that housing stays afloat here. If the housing bubble bursts, it is safe to say banks' ability to lend will be seriously pinched for a time."

"Recall that many mortgages are sold off by those doing the lending. That explains the letter you got shortly after you closed on your home that asked you to make your monthly check out to someone else. So-called smart mortgages have risen in popularity, the no-document, no-down-payment, no-principal; heck, no-payment-every-once-in-a-while, adjustable-rate jobbers."

"Believe it or not, these mortgages too are sold off. In a world plagued by low interest rates, they're gobbled up by investors hungry for yield and not so concerned about risk. Many of these investors are hedge funds. Here's where things get tricky. To juice returns, they're buying these investments on credit. And where do they get the loans to buy? Well, who makes loans?"

"In the worst-case scenario, banks could get it coming, in the form of defaults that directly impact their highly concentrated holdings, and going, in the form of bad loans to hedge funds."