It's holiday time and we need some good news. The Fed has been trying to bring down interest rates for higher quality corporate debt. Is it working? The answer is yes. Already the risk premium for bonds of JP Morgan Chase, Bank of America and GE have fallen by a quarter point. New offerings by Disney and Safeway were priced at 5 percentage points above comparable Treasury yields. Even junk bonds saw a slight improvement.

The Fed's willingness to buy mortgage bonds had the effect of dropping their yields a quarter percentage point. This is on top of an already previous three quarter percentage point reduction. Rates of jumbo mortgages have dropped to 6.91% from 7.25%. Even debt yields issued by banks insured by the FDIC have dropped. Citigroup's post-bailout bonds, which were priced at 3%, are now trading at a yeild of 2%.

So, we do have a bit of cheer for the holidays.

Investors bailing on Thornburg Mortgage (NYSE: TMA) are being short sighted. The stock is well on its way to recovering ground it lost on Monday when trading was halted after the stock lost 50% when ratings agencies downgraded it. The stock closed Thursday at $12.38, up $1.82 for the day, having already gained back 50% of its loss.

Why did the ratings agencies downgrade the stock? Perhaps because of the word "mortgage" in its name. But Thornburg Martgage has nothing to do with the subprime mortgage mess. Thornburg Mortgage writes only jumbo mortgages, average mortgage is just shy of $1 million, and only for high net worth individuals with superior credit. Delinquent loans total a mere 0.21% of Thornburg's $24.7 billion portfolio. This delinquency level is one-tenth of the average comparable portfolio's default level.

Up until Monday, Thornburg Mortgage was doing very well, originating $1.7 billion in new loans in 2Q 2007. The company presently has more than 20,000 customers, and holds just under $14 billion in loans. During the quarter, net income rose 20% to $83.4 million, interest income jumped 27% to $102.3 million, and operating expenses remained very low, 0.19% of assets. Not a single security in Thornburg's portfolio has been downgraded. Rather several dozen securities have been upgraded. The ARM portfolio is 94.6% AAA or AA rated. The problem is clearly not one of quality of the stock, but the fact that securitized mortgage bundles are no longer as liquid as previously anticipated.

CEO Garrett Thornburg has stated that the company will be able to self-finance as of mid-September after it has received August payments. It will pay out the quarterly dividend at that time. Garrett Thornburg's personal money is involved here, as is his reputation as a philanthropist in his howmtown. He is not about to risk either one. Contrarian investors need to look over Thornburg Mortgage quick while it's still a bargain.

While all investors should be painfully aware of incredible risks in subprime exposure in the current market, the ramifications of this sector's blow-up for other mortgage markets remains rather unknown.

An insightful New York Times piece that ran today broke the story which many investors, including myself, didn't truly understand -- the growing costs of borrowing money for large home purchases. As a result of much greater difficulty in re-selling private mortgage securities (basically a basket of mortgages grouped together and sold to a buyer), even low-risk borrowers are having trouble borrowing capital at reasonable rates of return because there is much less demand for these mortgage-backed securities.

This information is devastating for homebuilders in high-priced markets. Understandably, the already out-of-demand expensive homes are going to become even less in-demand as a result of potential buyers no longer being able to borrow the money needed to complete the purchase at reasonable rates. Due to this factor, among others, pricing is probably going to continue its decline.

Refinancing will also become much more difficult for very similar reasons. Because second-market mortgage buyers have been devastated by the subprime implosion, they won't have the ability to purchase nearly the same amount of refinanced mortgages that they once had.

In today's day and age it seems like everything is intricately connected to one another due to derivatives, leverage, and so on. Gone are the days when simple cause-and-effect analysis could be used to understand a piece of breaking news.