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Housing Market - And How It Could Get Worse

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Buying a home is the American dream. But behind that dream lie complicated financial relationships. And one of the key players -- bond insurers -- could turn the crack in the housing market into a crater.

Let us break it down for you. Joe and Jane America decide to buy a home. To pay for their house they get a loan.

Then Wall Street gets their hands on it. Joe and Jane's mortgage payments are put together with other loans to form a bond. In order to facilitate an efficient market, these bonds -- like many securities-- are insured.

But these days many people don't have enough money to cover their home payments, so the bond insurers are having to pay out too much money to cover for Joe and Jane.

It's a lot like what would happen to car insurers if everyone got in a fender bender on the same day.

However, if the bond insurers go under no investor will want to buy these now-uninsured bonds. That means banks will need to raise that money themselves and they're not going to want to do that.

If those events come to pass, the already sluggish housing market could be headed for a deep freeze

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In the scenario above, I think there would be a real spasm in the financial markets says Karen Finerman. But eventually, the market would digest the problem and we’d move along.

I don’t think investors should short the bond insurers much longer says Pete Najarian. I suspect the space will see some M&A activity.

Get long the vultures, Jeff Macke says, don’t get long the meat. I like Berkshire or Blackstone. At the end of the day, I think those are the guys who will eat.

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Trader disclosure: On Jan 10, 2008, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders; Macke Owns (YHOO); Najarian Owns (AMR), (BIIB), (C), (MSFT), (EBAY); Najarian Owns (CFC) Options, (WM) Options,(YHOO) Options; Finerman's Firm Owns (KSS), (WMT), (YHOO), (AEO); Finerman's Firm Owns (MDY) Puts And Is Short (MDY); Finerman's Firm Owns (MSFT) Options; Finerman's Firm Is Short (IJR), (IYR), (SPG); Finerman's Firm Is Short (LEH) And Owns (LEH) Puts; Finerman's Firm Owns Russell 2000 Puts And Is Short (IWM); Finerman's Firm Owns S&P 500 Puts And Is Short (SPY)