Not that anyone needed further proof of just how significant the collapse of the subprime market was last year. But, last month, the American Dialect Society selected "subprime" as the 2007 Word of the Year.

The global reverberations of the U.S. housing crisis were so great that it is almost hard to remember that many industry observers once thought the credit problems would be contained to the subprime market. Instead, it caused a "finance butterfly effect," according to Michael Youngblood, portfolio manager and managing director of fixed-income for FBR Investment Management.

"Who would have thought that a subprime loan issued in Orange County would cause near failure of a bank in Dusseldorf?" Youngblood asked in November at Information Management Network's ABS East conference in Orlando.

According to a Congressional report released in October, about two million subprime borrowers will foreclose on their homes through 2009, at a cost of about $71 billion. Almost none of the major banks escaped the crisis unscathed, as billions in investment losses have thus far been reported.

The summer seemed to bring stunning new lows for the industry on a weekly, if not daily, basis. July 12 was arguably one of the darkest days for the market last year.

On that day, Standard and Poor's downgraded 498 classes, leaving 26 classes on CreditWatch and removing 74 from watch for a downgrade later that day.

At the same time, Fitch Ratings placed 33 classes from 19 structured finance CDOs on rating watch negative as well as kept on review for downgrade eight classes of four structured-finance CDOs, affecting a total of $803 million. The rating agency also put 170 U.S. subprime transactions on review for rating actions.

Two days earlier, Moody's Investors Service downgraded $5.2 billion in 399 2006 subprime RMBS and placed an additional 32 RMBS under review for possible downgrade.

Meanwhile, Countrywide Financial Corp., America's biggest mortgage lender, saw its survival questioned after it was forced to draw on an $11.5 billion line of credit on Aug. 16 to bolster its liquidity. The troubled firm reported a $1.2 billion third-quarter loss and still faces rumors of potential bankruptcy.

The mortgage market was hit with more ominous news in November when Freddie Mac proved that it wasn't immune to the credit crisis, announcing a $4.6 billion third-quarter loss. It was the largest quarterly loss ever for America's second-largest financier of home loans. Both Fitch Ratings and Credit Suisse responded to the announcement by downgrading the GSE's preferred stock.

By December, the confluence of the year's events had left the battered industry shaken as it searched for answers. "I've been in these businesses for 30 years and I don't scare easy, and I'm nervous now," Lou Barnes, an owner of Boulder West Financial Services, said in an interview with ASR last month.

(c) 2008 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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