Readers suggested a topic surrounding the subprime news this week, starting with some quotes from an article. "Let’s talk about complacency for a moment. Ownit Mortgage Solutions, a California-based home lender, closed this week and told more than 800 workers not to bother coming back to work. The Los Angeles Times reported that Ownit simply ran out of cash needed to meet obligations."

"Here’s where the complacency enters the picture. Michael Youngblood, a research managing director for Friedman, Billings, Ramsey Group, noted that key aspects of subprime loans, combined loan-to-value ratio, debt-to-income ratio, and credit score, did not diverge from long-run averages."

A reader asks, "Wait a minute…so they have ALWAYS been doing 100%, no doc, no closing cost, stated income/NINA loans to sub-prime borrowers in the percentage and volume that they have been recently? I fond that highly unlikely. Anyone in the sub-prime biz care to comment?"

Another remarked, "The reason it’s changed is that prices stopped going up. When you can simply refinance into an I/O loan you don’t foreclose, rates now are higher than when most of these toxic loans where written."

"Add in the fact that houses bought last year won’t appraise for what they have outstanding on the loan (since everyone went I/O they haven’t paid down a dime of the loan balance) - and even if they can appraise they can’t afford to refi as rates will be higher. The endgame is here."

One senses a cash crunch. "I suspect that there are a number of financial players that are discovering a sudden need for cash and that this is the beginning of a selloff in everything. Gold, commodities, bonds, stocks."

"Once the fly-by-night subprimes start going belly up it can’t be long until those Credit Default Swaps start being called in and certain people discover a pressing need to sell anything they have to generate cash to cover them."

The New York Times. "Much of the growth of the United States in recent years has been financed by homeowners’ rising wealth. But now the growth in that wealth has almost vanished."

"The government reported this month that it estimated the equity of Americans in their homes rose a scant 0.1 percent in the third quarter. At an annual rate, that was just 0.5 percent, the smallest gain in more than a decade."

From Bloomberg. "Sub-prime mortgage bonds had their worst week of the year on concern about the failure of two lenders, the slowing housing market and the ability of borrowers to repay the loans, derivatives based on the securities suggest."

"An index of credit-default swaps based on bonds rated BBB- and consisting of sub-prime mortgages made this year fell 2.6 percent, to 95.36 today."

"'The information that has been released about the state of the U.S. mortgage market is not dramatically different than it was one month ago, two month ago or three months ago,' said Paul Ullman, CEO of a New York hedge fund specializing in mortgage bonds. 'What is different is the state of the industry.'"

"When sub-prime mortgage companies who service, or collect payments, on loans are shuttered, their failure is a bigger risk to bondholders than if a company that only lends shuts down, Ullman said. Ownit, which last year made more than $8 billion in sub-prime mortgages, was not a servicer."

"The reaction this week may be too severe, said Andrew Chow, who manages $5.5 billion of asset-backed bonds and credit derivatives, since 'investors are looking to the homeowners for the repayment of those loans; they're not looking to Ownit.'"

"This year 'is turning out to be a doozy of a year' in terms of sub-prime loan quality and 'slowing home prices are no longer allowing borrowers to hide behind the covers of a rising housing market,' wrote Gyan Sinha, a senior managing director at Bear Stearns."

"There is a risk that sub-prime loans from this year will experience higher cumulative losses than the 2000 vintage, the worst-performing ever, which as of today are around 5.5 percent, said FBR's Michael Youngblood. Poised to hurt the loans are weakening California job markets and the extent of 'payment shocks' when the loans' rates begin to adjust, he said."

"With concerns rising in recent months, investors have discriminated more among different issuers, 'a long overdue change in behavior,' Youngblood said."

The Financial Times. "The failure of a small Californian mortgage lender on Thursrday increased nervousness in the credit derivatives market about the large number of US 'subprime' mortgages extended this year."

"In recent years, this area has been one of the fastest-growing parts of the market for mortgage-backed bonds. So far in 2006, $437bn of such securities have been issued in the US."

"As measured by the ABX index, the implied price for bonds backed by 2006 subprime mortgages has fallen dramatically in recent weeks. 'Market opinion is clearly grounded on a fairly negative view regarding the fortunes of the bonds backing the ABX [index],' said Gyan Sinha, at Bear Stearns."

"He said problems are pronounced for bonds backed by 2006 mortgages, which cost almost 100 basis points more to insure than bonds that are backed by 2005 mortgages. Other signs of weakness include higher delinquency and foreclosure rates for 2006 vintage bonds."

"Moody's put a handful of 2006 subprime deals on watch for downgrade, the first negative ratings activity for bonds originated in these years."