While the sickly U.S. housing market drains the economy, real estate on the other side of the world is booming.

The world’s biggest property fund manager ING Real Estate recently laid plans for a second China fund.  The company has already spent most of the $350 million raised for residential development in China in 2006, and now a fund twice that size is in the works…

ING plans to spend an additional $700 million on Chinese real estate. Combined with a new Japan fund, ING will be spending $1.6 billion on Asian real estate in 2008.

"On the one hand you see part of the world slowing down, triggered by the credit crunch," ING Real Estate Chairman and Chief Executive, told Reuters. "And then you see another part of the world – China, Japan, and even Australia – where there are lots of opportunities."

Throughout Korea, India, even Singapore, and particularly China, upwardly mobile families are embracing their newfound middleclass lifestyle by seeking out homes.  As a result prices in the region have skyrocketed. New apartments in Shanghai are selling for as much as $17,000 per square meter, the Associated Press reported.

And it’s not just the locals scrambling to scoff up real estate either. The U.S. slump has driven real estate speculators abroad – and they too are driving up home prices throughout Asia.

India: Home to the World’s Most Attractive Real Estate

While opportunities can be found throughout Asia, it’s become clear that the best opportunities are in India and China, the region’s two strongest economies.

China’s annual economic growth is likely to mirror the 11.5% growth rate it has experienced over the first three quarters. India’s economy grew 8.9% in the third quarter after posting a 9.3% increase in the second. For that reason, India and China have to be all the more vigilant if they intend to preempt any possible bubbles.

In India, housing prices have been rising 30% to 40% annually over the last several years, but authorities have responded by raising interest rates and cutting back lending.

"The Reserve Bank of India has been keeping a tight lid on banks’ exposure to real estate," Ritesh Maheswari, a credit analyst with Standard and Poors’s in Singapore, told the International Herald Tribune. "We don’t foresee large-scale defaults."

Stability in the Indian market has been highlighted by ongoing trouble in the United States. An increasing number of investors now see the Indian property market as a safer bet.

"The region is enjoying sound property fundamentals. To date the credit crunch has not significantly impacted the markets here. Liquidity levels are still high, and both local and foreign investors have maintained their allocations to real estate," said a report by real estate consultancy Jones Lang La Salle Inc. (JLL). 

"Some bigger funds, which entered 2-3 years ago, are now very comfortable with the Indian market. Their experiences have become an attraction for many smaller as well as some non-institutional investors from U.S. to put money in the Indian property market to minimize risks," JLLM senior manager Abhishek Kiran Gupta told the Economic Times.

China: More Risk for the Buck

Unfortunately, nothing in real estate is slam-dunk any more – and that goes for China, too. Because of more lenient lending restrictions and higher speculation, some consider housing loans in China riskier than those in the United States.

Yi Xianrong, an economist at the China Academy of Social Sciences, believes China’s lack of a comprehensive credit data system lets borrowers falsify information when applying for mortgages. Yi estimates the overall quality of property loans in China is even worse than the risky mortgages that have wreaked havoc on the U.S. market.

Regardless, housing price inflation on China’s mainland hit a new monthly high of 9.5% in October, with prices rising nearly 18% in Beijing alone.

"I found prices rose too fast and I didn’t know why," Sun Chunming, a technician in Shanghai told IHT, "But I was worried if I didn’t buy it now, I might not be able to afford one later."

China’s biggest property lender, China Construction Bank Corp., recently issued a report that warned banks to beware of falsified credit data and tighten their lending practices. The bank sees this volatile time as a high-risk period for personal housing loans.

Beijing Clamps Down

As expected, the Chinese government has also stepped in by taking increasingly severe actions to regulate banking and lending practices. China has raised both interest rates and reserve requirements, and now, gone as far as freezing lending all together for the remainder of 2007. It has also issued "guidelines" for banks to follow when allocating capital for loans next year.

Earlier this month, regulators quietly ordered China’s commercial banks to freeze lending through the rest of the year, the Wall Street Journal reported.

A China Banking Regulatory Commission official described the request to the WSJ as "guidance aimed at supporting the macro-control measures being implemented." But bankers say that to comply they must cancel loans and credit lines with businesses and individuals alike.

Also, CBRC quietly instructed banks not to loan money to industries known as "Two Highs, One Surplus," Forbes reported in September. The "two highs" are industries consuming high levels of energy and producing excessive amounts of pollution. The "one surplus" refers to industries saturated with excess capacity, notably real estate developers. The CBRC has denied imposing a blanket freeze on lending, something it has done in the past. The last time China instituted such a policy was April 2004.

Curbs on lending may prevent Chinese banks from inflating their loan books temporarily but most analysts expect pent up demand to be unleashed in the beginning of the new year. 

That may be why China already has its sights set on 2008, a year the government in Beijing has begun regulating in advance. Dow Jones cited a memo detailing a meeting between bank executives and Chinese authorities in which lenders were told to submit lending plans for next year. The government also recommended quarterly lending quotas.

"Next year is a special year with the change in government and Beijing Olympic Games. If loans get out of control that could lead to harsh macro-controls and the biggest losers would be commercial banks," the memo read.

Banks have been instructed to allocate 30% to 35% of their full-year loan allotments within the first quarter, 60% to 65% by the end of the first half, and 80% to 85% by the end of the third quarter. Any remaining quarter is to be made available in the fourth quarter. Banks should have some breathing room beyond those figures, but anything deemed as excessive loan growth will result in penalties.

News and Related Stories:

• Forbes:
  China Clamps Down Further On Bank Lending

• International Herald Tribune:
  Asian property boom triggers fear of a crisis

• Economic Times:
  American investors high on Indian real estate

• Reuters:
  ING plans $700 mln China property fund

• Wall Street Journal:
  China Tells Banks How To Parcel Out Lending Next Year

• Money Morning:
  How to Profit From a Stock Market Bubble

• Money Morning:
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• Money Morning:
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By Karim Rahemtulla
Guest Columnist

After spending the last 29 hours on various airplanes and stuck inside airports, I finally made it to Mumbai, India. It’s an ardous trip from the States, but well worth it. Now that we’ve had several days to meet with Indian officials and businesses, here are some snapshots of opportunities and a few words of caution…

The Bombay Exchange

Let me tell you, it’s hot here. And I’m not talking about the weather. The Bombay Stock Exchange recently hit a new all-time high, approaching the 19,000 level. That’s almost double where it was this time last year.

Great news, you say. Well, yes and no. Although the country and stock market is flourishing right now, the rapid growth is scaring many investors.

Moreover, the Bombay Exchange is a fairly illiquid market. My good friend and Quantum Fund manager, Ajit Dayal, tells me he will only look at companies that trade at least $1 million in share value per day for a year ($1 million in value, not 1 million shares).  Otherwise he considers them a liquidity trap. With 7,000 stocks trading on the Bombay exchange, you wouldn’t think that would be much problem. But you might be surprised. Guess how many fit his criteria?

Just 284. Yes, there is money to be made from India. But with odds as low as that, I’m holding tight on any recommendations. The market just can’t handle it right now. On the next correction, I’ll recommend buying, but not at these levels.

The Lagging Infrastructure

India is a dynamic country. The place is teeming with life and energy. Foreign funds are pumping money into India at a record pace, and certainly an economic miracle is happening here.

But the country is also exploding at the seams. The roads are a mess. The power grid is a mess. Everything is a mess.

I noticed it as soon as I set off for my hotel.  The Taj Mahal Hotel in Mumbai is a fabulous place, but despite being just 15 miles from the airport, it took an hour-and-a-half to get there.

The thing is, city officials have talked about finding a new route to the airport for ages. They’ve talked about a bridge over the bay. Some say this will be an 8-lane monster, making the journey just 20 minutes. I say: "You said the same thing 25 years ago. I don’t care if it’s 8 lanes or 12 lanes… for heaven’s sake, just build it!"

Investing in infrastructure is by far the easiest play in India. The problem is that very few Indian shares trade as ADRs, which means you either have to invest in a fund, or directly in the market in India, which is not easy, due to restrictions for foreigners.

However, if you are determined to take advantage of the opportunities in infrastructure, and are willing to take the short-term risks of being in a toppy market, then the play here is Larson and Toubro Ltd., a medium-sized company that is involved in every level of infrastructure and construction in India. It is publicly traded on the Bombay Exchange.

30% Growth In "Tech Town"

Upon arriving at the Satyam Computer Infoway (SAY) campus, there was only one reaction: Absolutely spectacular. The place is a sprawling oasis for its 18,000 workers. Like a modern company town, many Satyam employees live on-site, enjoying a fantastic lifestyle that clearly helps them with productivity.

For some time now, the IT giant has racked up revenues and earnings growth in excess of 30% per year. And there doesn’t seem to be much blocking its path to further growth. Except one trend…

The Party-Crashing Rupee

You would think that a strong Rupee would bode well for India, since it could draw more investment into the country.

Granted, while hefty capital inflows to India are certainly helping the country’s growth, some of that is offset when the Rupee is strong against the U.S. dollar – as it is now (along with just about every other currency, it seems).

That’s not a good trend for companies like Satyam or fellow technology powerhouse Infosys Technologies Ltd. (INFY), India’s second-largest software firm.

While Infosys did report an 18.4% jump in net profits – reaching $280 million – in the last quarter, the fact that it does most of its business (more than 60%) with American companies, or companies in dollar-based economies, means that over the long-term, it doesn’t want to see this trend continue.

That’s because with each day the dollar weakens, Indian firms like Satyam and Infosys have to offset the loss. And there are a number of ways it can do so:

1. Be more productive.
2. Use dollar hedges.
3. Raise prices.

Right now, Satyam is doing all three, while Infosys says it is "proactively hedging our currency exposures to mitigate this impact."

Right now, the impact of a U.S. dollar/Rupee ratio of 38 or higher should not have a huge impact. But should the Rupee rise another 10% or so (to the mid 30s), there will be pain all around. That will be the opportunity to buy both these companies, which have excellent futures.

So what does the Indian government and central bank make of this?

Policymakers To Get Proactive

Simply put, they’re quite concerned about Rupee appreciation. But they have a history of active currency management, which leads me to believe that the current Indian pickle may be a short-term trend – 12-18 months at most before the Rupee will be back over 40-to-1.

We met with representatives of the state and federal government and the bottom line is that policy makers have little choice. They need to export goods and services in order to stay competitive with countries like Malaysia, South Africa and even Egypt and Slovenia – all up-and-coming countries in the same IT sector that is crucial to India’s growth.

Real Estate and Banking

The real estate sector is booming with development occurring everywhere. Most of the new properties are located in the suburbs of Mumbai and Delhi – away from the masses and the traffic. But these suburban panaceas are not very practical for those working in the cities, and are mostly inhabited by those who don’t need to conduct business in town. [As I mentioned, the 15-mile drive from the airport to city center takes an hour and half on a good day. And the suburbs are all located past the airport].

Banks stocks have, by far, been the stellar performers in India. They are lending money left and right. The most aggressive bank is ICIC Bank Ltd. (IBN) – but it is also the riskiest in terms of the quality of assets.

A better alternative is HDFC Bank Ltd. (HDB), which has much more stringent criteria and a much more conservative lending philosophy. This would be the bank to buy during any dips in the market. Both trade as American Depository Receipts (ADRs) in New York, but neither is cheap at current prices.

Karim Rahemtulla is also the Investment Director and Founder of the Xcelerated Profits Reports and is also the editor of the Smart Profits Report, a free e-letter, which you log onto at www.smartprofitsreport.com.

News and Related Story Links:

• Money Morning:
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• Money Morning:
  India Gains Importance as an Economic and Political Epicenter

• Money Morning:
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• Money Morning:
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• Money Morning:
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• Money Morning:
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By Jason Simpkins
Staff writer

The news on the U.S. housing market continues to get worse. And the slump is now affecting the consumer psyche.

Sales of previously owned homes dropped by 4.3% in August, the sixth-straight month sales have declined, the National Association of Realtors said yesterday.

Sales declined at a seasonally adjusted rate fell to 5.5 million units, its lowest level since August 2002. In a bit of good news, the median price of an existing home climbed to $224,500, a 0.2% increase from a year ago. It was the first year-over-year increase after a prices dropped for 12 straight months.

Even so, home prices in 20 U.S. metropolitan markets dropped 3.9% in the 12 months ending in July. An index of 10 U.S. cities fell 4.5% in July from a year ago – the largest drop since 1991, a period of 16 years.

The supply of homes for sale at the end of the month rose to $4.58 million, the most ever. Hoping to unload an abundance of seemingly un-sellable homes, homebuilders have been offering more enticing incentives. The effectiveness of such measures is yet to be seen, but S&P Committee Index Chairman David Blitzer told The Associated Press that severe declines may have finally subsided.

"Maybe the first stage is steep declines, and we’re just about done with those," he said, "The second stage is not much gain, not much loss."

It doesn’t seem as though home sales will stabilize any time soon. Many economists think it may take until well into 2008 before prices fall low enough to put any kind of a dent in the large glut of homes saturating the market.

It may be too late, however, as consumer confidence has clearly been affected. The Conference Board’s index of consumer confidence fell from 105.6 to 99.8 in August. The fall was greater than forecast and has left the index at its lowest point since 2005.

Federal Reserve Chairman Ben S. Bernanke is no doubt monitoring these and other indicators to determine further federal action. According to Joel Naroff, president and chief economist of Naroff Economics, the September employment report may be the most vital gauge to in determining the Fed’s decision.

"If that is soft, then it would be hard to argue the economy doesn’t need more help," Naroff said, "If we keep seeing job gains below 100,000 per month, the Fed will have to step in."

Should home prices and consumer confidence continue to plummet, the Fed may be forced to reduce rates by another 50 basis points by the end of the year, many economists and analysts believe. Others, however, believe such cuts will cause the U.S. dollar to weaken even more, and cause inflation to really take hold in the U.S. economy for the first time since the early 1980s.

From Staff Reports

Australia’s ongoing economic boom – fueled by the continued growth in the Asia-Pacific Region – has left Aussie families less leery of debt, and more vulnerable to an economic shock or recession, Reserve Bank Deputy Governor Ric Battellino stated at a convention in Melbourne yesterday.

At a convention organized by the ‘Melbourne Centre for Financial Studies,’ Battellino said that Australian households were running a "highly mismatched balance sheet," consisting of property and shares on the asset side of the personal ledger, and a load of debt on the liability side. It’s the kind of highly leveraged mix that professional investors use to magnify returns on the upside – but which magnifies and acclerates losses on the downside.

"This balance sheet structure is very effective at generating wealth in good economic times," Battellino told the audience, according to a report by Australia’s Age.com newspaper. "But households need to recognise that it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise."

But there’s also some good news. Unlike in the U.S. economy, where high debt levels are used to help fuel consumption, the rise in debt in Australia is being taken up by mostly higher-income households, and was used to buy such assets as homes, stocks, and investment properties. That means the debt is backed by assets, which can help diffuse any damage during a downturn, Battellino quite correctly observed.

"It would be a mistake, therefore, to conclude that a rising ratio of debt to income is necessarily a sign of financial stress," Battellino said.

But debt loads are worrisome when they climb. And in a sobering commentary, Battellino said there was absolutely "no precedent" in Australian history for the constant – and essentially vertical – growth in debt over the past four decades. In the mid-1960s, credit was only equal to about 25% of Australia’s gross domestic product. Today, that exceeds 150%.

News and Related Story Links:

• The Age.com News:
  High Debt Leaves Households Exposed: RBA.

• Speech by Australian Reserve Bank Deputy Governor Ric Battellino:
  ‘Some Observations on Financial Trends,’ Address to Finsia-Melbourne Centre for Financial Studies, 12th Banking and Finance Conference, Melbourne, Australia, Sept. 25, 2007.

• Money Morning News:
  Aussie Bank Chief Favors ‘Big Four’ Merger to Avoid Asia-Market Irrelevance.

In an interview that conveyed a deep sense of economic gloom last week, former Federal Reserve Chairman Alan Greenspan told Bloomberg News that the odds of a U.S. recession remain "somewhat more" than one in three. Home prices will likely drop further, disrupting consumer spending and undermining investor confidence, Greenspan said during the interview.

Market data appears to support Greenspan’s prognostication. Indeed, according to real-estate market researcher RealtyTrac Inc., the number of Americans in danger of losing their homes to foreclosure has more than doubled just from last year. According to the company, lenders sent notices of default to 108,716 homeowners in August, more than two-and-a-half times the level of a year ago.

Adjustable-rate mortgages to subprime borrowers accounted for 7.3% of all home loans and 44% of all new foreclosures, according to the Mortgage Bankers Association. An estimated 2 million to 2.5 million adjustable-rate mortgages (ARMs) are scheduled to reset this year and next, jumping from low ‘teaser’ rates, to much steeper rates that in some cases could cost borrowers their homes.

Also, according to RealtyTrac, the total number of foreclosure filings rose 115% to 243,947 in August from a year earlier. That figure includes defaults, scheduled auctions, and bank repossessions.

As CNN reported, in the next few years more than 75% of the nation’s housing markets will suffer an overall pricing decline – some by double-digit amounts. Economy.com said that home prices would drop more than 10% in 86 of the 379 largest markets.

The metropolitan areas hardest hit will be Stockton, Calif., where prices could fall as much as 25%, and the Palm Bay-Melbourne-Titusville and the Sarasota-Bradenton-Venice regions of Florida. Those two areas will likely see declines of 24.9% and 24.8%, respectively.  Currently, the average home is down 7.7% in value. That means values are continuing go decline, since they were down only 6.6% in June.

If home prices as much as experts have projected, U.S. households could lose $3 trillion in wealth, a leading housing economist and former mortgage bank president said in written testimony to U.S. lawmakers last Wednesday.

Peter Orszag, director of the Congressional Budget Office (CBO), told a Senate panel that a reduction in consumer spending could be the direct result of a decline in household wealth.

The upcoming reset of billions of dollars worth of ARMs – and the likelihood that home prices will continue to plummet – does not bode well for an economy struggling to emerge from a credit crunch and a commercial paper slump. In terms of the "resets," which begin in a wholesale fashion next month, was one of the reasons Federal Reserve policymakers cut interest rates by half a percentage point last Tuesday.

Last week, the U.S. dollar sank below the Canadian dollar in value for the first time in more than 30 years. It has repeatedly bottomed out against the euro as well. The U.S. dollar has now dropped 6.6% against the euro on the year. The Fed’s rate cut will only make it weaker and inflation is beginning to again rear its ugly head. 

So will higher energy costs. Oil prices have surged above $82 a barrel in recent days, and now many analysts are predicting $85 oil isn’t far off.

In a new economic forecast, Fannie Mae Chief Economist David Berson, predicted U.S. economic growth would slow to 2.3% this year from 2.6% in 2006. The median price of an existing home will probably fall 2.1% this year and 3.1% in 2008, he said.

"Economic growth is likely to slow in response to the problems in the housing and mortgage markets," Berson said in the forecast. "Whether that slowdown will turn into a recession is unknown."

News and Related Story Links:

• Bloomberg News:
  Greenspan Says Recession Still Possible After Fed Cut.

• CNNMoney.com:
  Double-digit home price drops coming.

I’ve been waiting for a few weeks to see if anybody will say it – and, not surprisingly, nobody has.

So I will.
  
The truth about who caused the subprime mess.

In my humble opinion, it was the Fed. Sure there were contributing parties, so I’m not pointing the finger solely in Washington’s direction. But they clearly should bear the brunt of the blame here. As for the rest of the hyenas, they, too, should get some of the blame, since everybody from the borrowers to the mortgage lenders piled on over the past few year. As for Wall Street, together with the international banking community…don’t even get me started: Greed, as so many investors discovered, is not “good.”

As the sole agency responsible for maintaining an orderly and functional marketplace, the Fed is the one body that truly could have taken control and nipped this in the bud.

Instead, they let it build.

Former Fed Chairman Alan Greenspan is on record as calling the mortgage market a “powerful stabilizing force” in 2002. Then, in 2004, he went further by noting that that adjustable rate mortgages were great for consumers because they saved on interest-rate costs and prepayment penalties. Then, in 2005, he noted that new subprime loan products were a good thing because they showed innovation in the marketplace [To see what Greenspan had to say about the Fed’s role in the bull market of the late 1990s, click here].

This last item is particularly galling because 2005 also saw the first big issuance of subprime mortgages – a record $625 billion worth.  The data was apparently so far out of whack that the Fed apparently thought it was a mistake because it was so high.

Shades of Gordon Gecko anybody?

However, I don’t write policy, and hindsight is 20-20.

So let me say that I’ve always believed in free markets and I continue to believe in them. I’m particularly frustrated by recent Fed actions and I have been for several years. The Fed has tacitly stood by as the world built up an incredible asset bubble that some estimate is in the tens of trillions of dollars and which has been expanding since the late 1990s. Then, by keeping rates so low for so long, and then by encouraging people to scavenge the equity from their homes, the Fed allowed it to slither unencumbered into the housing market, where – until recently – it was fed like some sort of ravenous python.

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Why are they surprised now that the once tiny garden snake has become a trillion-dollar monster and turned on them? I’m not.

You simply cannot reasonably interfere with normal market adjustment mechanisms via policy level decisions and expect things anything even remotely resembling normalcy. The markets depend on give and take and clearly there was a lot more “taking” in the past few years than giving.

So why should we bail the greedy guys out by providing excess liquidity?

I don’t think we should. My own belief, and I’ve been on record for several years saying that this was coming, is that the Fed should have initiated a “Volcker-style” torpedo to literally reign in a burgeoning asset bubble, identified as early as the late 1990s, when Big Al Greenspan so famously coined the term “irrational exhuberence.” The Fed missed another chance in 2005.

Would this cause a market crash?

I doubt it, but a severe correction would be in order.

But you know what? At the end of the day, we need a massive correction; and studies show that periodic corrections are actually good for the longer-term returns because it washes out the speculative money before the market indices retrace their highs.

My point is that the Fed’s been sticking its nose into places it shouldn’t be for too long now. Price/Earnings Ratios are artificially high around the world, and the excess liquidity they’ve helped provide is now a fact of life that we will have to deal with…and that will make solid returns that much harder to achieve…and keep.

Breaking up the old boys club would be, I submit, good for investors…at least serious ones anyway…and I’d love to see it happen.

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Countrywide Financial Corp. CEO Angelo Mozilo said yesterday (Thursday) that the housing market isn’t improving and could sink the United States into a recession.

In answering questions on cable-TV channel CNBC, Mozilo said there is a “very serious situation going on” in the U.S. housing market. “This environment is certainly not getting better,” he said.
 
These gloomy words came less than 24 hours after Bank of America (NYSE: BAC) pumped $2 billion into Countrywide (NYSE: CFC), the largest U.S. home-mortgage lender, in exchange for convertible securities. The news instilled a big vote of confidence into the market, which opened with a strong start.

Mozilo’s sour words seemed to contradict his earlier upbeat comments when he labeled the Bank of America’s investment as a saving grace. “Bank of America’s investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success,” Mozilo said in a statement.

Mozilo’s grim forecast put a screeching halt to his company’s stock; shares opened 7% higher yesterday morning, only to finish the day 0.92% lower. It also threw a wet blanket on Bank of America, who could have cashed in on a $700 million profit when Countrywide’s stock reached its peak of $24.46.

But looking closely at Mozilo’s careful wording shows that he didn’t flip flop. He’s confident in his company’s ability to get through a potential recession, undoubtedly easier to say after a $2 billion injection from Bank of America. And when asked if a recession is possible, he said yes.

Such an apparent difference can be explained by one word: “if.” Mozilo’s grim forecast was an answer to an ‘if’ question, which revels in speculation. Yes, it could happen, he said.

Unfortunately for him and the rest of Wall Street, investors buy and sell on emotion. Say the wrong word like “recession” and it’s no surprise investors made Countrywide’s stock pay the price.

60,000 Jobs Lost Because of Credit Crunch

Perhaps the ones who best understand Mozilo’s duality are the workers laid off from lending institutions. The Associated Press reported that 40,000 people in the mortgage field have lost their jobs since the beginning of the year, according to data compiled by outplacement firm Challenger, Gray & Christmas Inc. In addition, nearly 20,000 jobs have been cut in the construction field.

“These kind of mortgage lenders just sprung up like mushrooms and grew like men,” John A. Challenger, chief executive at Challenger, Gray & Christmas, told the AP. “They staffed up and now you have a bust.”

What’s unclear is if the employment scale back is a temporary situation until the mortgage and housing markets pick up again.

And fittingly, Mozilo unintentionally answered that if scenario as well when he said “this environment is certainly not getting better.”
 

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The number of U.S. foreclosure filings reported for July were up 93% over the same month last year, the latest sign that homeowners are having trouble making mortgage payments or selling their homes during this national housing downturn. Foreclosure reports were up only 9% from June, The Associated Press reported.

This is expected to get far worse before it gets better. In its Aug. 16 edition, The Wall Street Journal reported that after lenders acquired an average of 440,000 homes annually in each of the seven years from 2000 to 2006, they would be looking at acquiring about 760,000 homes this year and another 935,000 in 2008.

In the report yesterday (Tuesday), there were 179,599 foreclosure filings reported during July, up from 92,845 during the same month last summer, Irvine-based RealtyTrac Inc. said. There were 164,644 foreclosure filings reported in June. The national foreclosure rate in July was one filing for every 693 households, the company said.

“While 43 states experienced year-over-year increases in foreclosure activity, just five states – California, Florida, Michigan, Ohio and Georgia – accounted for more than half of the nation’s total foreclosure filings,” RealtyTrac Chief Executive Officer James J. Saccacio said.

Foreclosure filings consist of default notices, auction sale notices and bank repossessions.

When the subprime mortgage crisis broke in February, I assumed (like most others) that its ill effects would be confined to obscure housing finance companies within the United States – a niche of the financial sector in which I had no interest in investing anyway.

But the recent collapse of the German industrial credit bank IKB Deutsche Industriebank AG abruptly signaled to investors and analysts alike that the problem was much more widespread than originally anticipated. IKB – a mid-sized bank – accumulated $17 billion in subprime mortgage exposure through the derivatives market. In the end, its exposure far exceeded the bank’s liquidity and equity capital… thanks derivatives market!

On the heels of the IKB collapse, we’re now discovering subprime mortgage exposure the world over, and market jitters grow worse by the hour. Particularly frightening to investors are foreign banks, previously thought to be immune to such a “U.S.-only” crisis.

The drastic decline in value could put daily operations of some banks in peril and have nasty spillover economic effects.

Considering the severity of the credit crunch and the anxiety that’s gripped world financial markets, it’s time we all understand precisely who owns what, and how much.

Fortunately, Wachovia Bank’s Jay Bryson just published a special commentary that spells out exactly where the greatest subprime mortgage exposure exists.

Eurozone Exposure

According to Bryson, residents of the 13 nations in the eurozone (the geographical and economic area where European Union countries have adopted the euro) own about $280 billion in U.S. mortgage debt.

Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE) and other government-funded entities issued about $160 billion of the total; corporations issued the other $120 billion.

Of the $120 billion of corporate-issued debt, $20 billion is commercial paper, and $100 billion is residential. (It’s the corporate-issued debt, specifically residential debt, where exposure to the troublesome subprime mortgage debt exists.)

Some unknown fraction of the $100 billion (in residential debt) is subprime, which accounts for only 1% of securities owned by eurozone residents, and is likely concentrated among relatively few financial institutions.

We know that IKB owned $17 billion of subprime-backed securities and the French bank BNP Parabis (EPA: BNP) owned $3 billion… so it’s plausible that only modest exposures remain yet undiscovered in the eurozone.

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British Exposure

Britain – the largest financial services sector in Europe – has $70 billion of outstanding mortgage-backed securities, roughly $44 billion of which are corporate-backed mortgages (with subprime exposure). The sheer size of the exposure suggests that some British institutions will incur substantial losses. But there’s more to Britain’s subprime story than merely gauging exposure to U.S. debt.

Britain is a wildcard because its own subprime crisis may actually be worse than that of the United States. According to the Council of Mortgage Lenders, lenders foreclosed on 14,000 properties in the first six months of the year, 30% more than in the year-earlier period. The council estimated that 125,100 British residents are behind in their mortgage payments – about 1% of the total.

Far East Exposure

Japan and China each have large exposures to the U.S. mortgage market. A fat chunk of China’s $260 billion-exposure is held in the central bank’s foreign reserves (which currently total $1.33 trillion).

Japan’s U.S. mortgage exposure rings in at $200 billion.

But Fannie Mae and Freddie Mac back the majority of the mortgage debt in China and Japan, leaving only marginal exposure to corporate-backed mortgages. Japan has roughly $10 billion in corporate-issued mortgage debt. China has about $20 billion, of which only a slice is subprime… a small amount relative to its economies.

And, it seems none of the major Japanese investment houses had a large, or troubling-enough position to cause concern.

Taiwan and Korea also have substantial holdings of U.S. mortgage debt – around $50 billion each – but like China and Japan, their exposure to subprime is also a very small percentage of overall holdings.

How To Play The Subprime Bust

All told, U.S. subprime mortgage debt is spread pretty widely around the world. Many banks and investment managers simply couldn’t resist the mortgage debt’s high-yield appeal. The problem is they didn’t know the U.S. markets well enough to avert trouble.

As the data indicates, some regions carry far less guilt than others, but are being unfavorably impacted by the panicked selling, nonetheless. As a result, investors in sound foreign banks and finance companies should feel confident in using any subprime-related market declines as opportunities to add more shares.

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Sales of existing U.S. homes plunged nearly 11% in the second quarter as the nation’s real estate market continued its slump – just one in a slew of bad-news reports that emanated from the real estate market yesterday (Wednesday).

In related news:

• Countrywide Financial Corp. (NYSE: CFC) – the largest U.S. mortgage lender – saw its shares fall $3.17 each, or 12.96%, to close at $21.29, on rumors the mortgage company has been unable to raise money from the commercial paper market. Merrill Lynch & Co. raised the possibility of a forced bankruptcy, Bloomberg News reported.
• U.S. homebuilder confidence fell more than forecast to a 16-year low in August, according to the National Association of Home Builders/Wells Fargo Index of builder confidence, reaching lows not seen since 1991, when the U.S. economy was still suffering from recessionary fallout.
• U.S. stocks fell again yesterday after the Federal Reserve again added cash to the U.S. banking system, a move that will undoubtedly help in the long run, but in the short-term seemed to fan fears by reminding investors the credit crunch problems are still extant. The Dow Jones Industrial Average dropped nearly 170 points, closing below the psychologically important 13,000 level.

According to the National Association of Realtors, home prices dropped during the second quarter – the fourth consecutive quarter that they’ve done so – with the price of a typical single-family home reaching $223,800, a decline of 1.5% from the year-ago levels of $227,100. Not surprisingly, confidence among U.S. homebuilders also declined. 

The National Association of Home Builders/Wells Fargo index a gauge of industry-wide confidence, dropped two points to an overall score of 22.  The reading was the weakest since the index hit a record low of 20 during the 1991 recession.  A reading below 50 means most respondents consider conditions poor.  The gauge has consistently fallen over the past six months.

Hardest hit by the news may have been Merrill Lynch & Co. (NYSE: MER) and Countrywide Financial Corp. (NYSE: CFC), whose stock plummeted for the fifth-straight day after talk of bankruptcy surfaced. Its shares closed the day at $21.29, after declining nearly 13%. Merrill Lynch was down $2.40, or 3.3%.  Somehow, Thornburg Mortgage Inc. (NYSE:TSA) resurrected itself; gaining 38% after its shares lost nearly half their value Tuesday.

The Dow closed at a four month low of 12,861.47, after falling 167.45 points, or 1.29%. That closely watched blue-chip index has now shed nearly 1,000 points since topping 14,000 in July. Meanwhile, the S&P 500 turned negative for the year, closing down nearly 20 points, or 1.4%, to 1,406.70. The Nasdaq composite index dropped 40.29 points, or 1.6%, to reach 2,458.83.

The recently volatile Dow had also risen as many as 90 points Wednesday, as bargain-hunters sifted through pummeled shares. The volatility index of the Chicago Board Options Exchange hit yet another four-year peak.

"The most savvy investors are seeing an opportunity with the increase in volatility,” James Smothermon, active trading and investing strategist for discount broker Charles Schwab (Nasdaq: SCHW) , told The Associated Press. “Individuals not as used to this are having trouble navigating" the rough waters. He said that clients have been changing their strategies through tactics like buying insurance on their portfolios and buying put options, or they are employing contracts that let an investor sell part of an asset at a set price within a certain time period.

And while the central bank again added liquidity to the financial system, it has not shown any signs that it will cut interest rates at its Sept.18 policymakers meeting, the only substantive move that could ignited a stock market rally. But inflation fears have kept the Fed from making such a commitment, especially with energy prices still trading at high levels (albeit lower than peak prices); the Labor Department said yesterday (Wednesday) that its Consumer Price Index (CPI) rose a mild 0.1 percent in July, in line with what was expected, though noting, too, that energy prices remain high.

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