Deutsche Bank (NYSE: DB) expects almost half of all U.S. homeowners to be underwater -- figuratively, of course -- by 2011.

Declines in home prices and the fact that some of those difficult mortgages just aren't going away put 26% of homeowners in this situation by the end of last March, and it seems the situation is only going to get worse. Unlike the early stages of the credit crisis, which were driven by subprime mortgages, the next iteration will have a greater effect on prime mortgage borrowers, which comprise two-thirds of the loans outstanding.

The median price for existing homes in California gained 1.4% in April, posting an increase for a second month in a row. The bold are calling this the bottom (or close to it), though another financial market surprise could change the rules as it did six months ago. However, if the small uptick is real, it could mean that the worst is behind us, as some use the California residential real estate market as a leading indicator for the broader economy.

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.