Between Friday and this morning, I decided to open new short positions related to the mortgage market.  I bought January 2009 $30 puts on Wells Fargo and January 2009 $20 puts on Countrywide.

The reason for doing this is because I think the subprime market isn't the only market that is going to be hit hard by the defaults.  In 3 months, the subprime market has gone from a non-issue to a meltdown.  My reasoning is that if people that were previously not able to borrow because of bad credit, then by lowering standards, lenders in fact bumped people's credit score up.  So you'll see higher default rates for higher credit scores in the past.  This doesn't even take into account people buying negative amortization, interest only, and other types of exotic loans that helped people buy a place with little to no money down.

The reason I purchased these options so far out was because I wanted to give myself some extra time as a cushion, just in case this story takes a little bit longer to develop.

Nevertheless, this has me begging the issue of whether or not real estate has in fact stabilized.  If credit is being tightened, that means not as many people will be able to buy a home.  Add to that more supply coming to market because people are defaulting on their loans.  That's not very good news for the real estate industry for at least the next 12 to 18 months, probably more.

Update:  Look at the chart on mortgage delinquencies by state over at Calculated Risk.  As the author notes, the problem is that the areas that had the most exotic mortgages haven't seen any rise in delinquencies yet.