Cramer Calls Another Housing Bottom…Puh-leeeze. Enough is Enough!

Posted on August 24th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Dear Mr Cramer,

 

I am upset at the story you put out over the weekend regarding housing and yet another prediction  of a bottom, this time in seven months.

 

I believe you are intentionally deceiving people. Calling the bottom to housing using a variety of bad indicators and rampant speculation is wrong. I am giving you the benefit of the doubt by saying you are ‘deceiving’ people because there is no way you are this naive about the housing and mortgage markets.

 

In your research story published yesterday in RealMoney and TheSreet.com, you use the fact that 14 million homes were “purchased” between 2005 and 2007 and those being the ‘bad lending years’ for the basis of a hypothesis that the housing market will bottom seven months from now. You also talk about new home builders reducing their supply, the FDIC offering mortgage modifications and FHA being the savior.

 

If you are a headline reader, perhaps these things do sound great. But, in reality very little of your analysis or conclusions have substance or are likely to come into play in any significant way.

 

First, you are overly attached to ‘subprime’ when anyone following the story knows that the Alt-A and Prime universes are beginning to blow and they dwarf the subprime universe.

 

Second, you overemphasis ‘fraud’ when we all know that while fraud is a big factor, lender negligence and negative-equity are the leading contributors to loan default especially among higher grades of paper.

 

I should have stopped reading after the ’14 million homes purchased’ statistic was thrown out.  This is because purchases were only about 33% of the market at any given time and millions more refinanced into exotic loans than ever purchased a home using them. In addition, prices are down near 2004 levels and approaching 2003 levels quickly. There were exotic loans during those years as well, so only focusing on homes ‘purchased’ from ’2005-2007′ captures a small portion of the at-risk market.

 

But of course, due to my distaste for much of your shotgun-approach research that costs so many so much, I thought I would spend a couple of hours and prove once again that these problems are very deep and throwing out a quick-read story citing a couple of low-level statistics is absolutely worthless when trying to dissect the future of housing and mortgage finance.  

 

Let’s go…

 

Cramer: Map to a Housing Bottom

8/22/08 – 2:11PM EDT

 

“I am kind of amazed at some of the things that no one seems to care about. When the FDIC seized IndyMac, it was a godsend — get that crummy lender out of the picture. Then the FDIC announces a radical plan to allow homeowners who borrowed from them to get off the toxic 2-and-28s and teasers and go into fixed-rate loans with some forbearance. We got that this week. No one cared! No one!”

 

First off, it is not the ‘2-and-28’. It is the 2/28. Who cares about the 2/28 Cramer? And at the time IndyMac was seized they were a good lender focusing on Prime and FHA.

 

The market has by and large solved the subprime problem on its own. Most of the 2/28′s that will default have defaulted but not all by any means. What you forget are the 3/27′s, which were not as popular but still about 33% of all subprime ARMs. They are currently resetting now and that should peak late this year. 

 

Also, the recidivism rate among all subprime modifications is higher than 50% so the original 2/28′s that were worked out and perform fine for the first six months will continue to default at a 50% clip going forward. Subprime defaults reached a high a few months back and have declined some, but will likely not decrease significantly for a long time.

 

That being said, Alt-A and Prime defaults are surging.  The ’Alt-A Implosion’ is being led by the Pay Option ARM, which is a subset of the Alt-A universe. As a matter of fact, despite the subprime default rate dropping, overall monthly default counts have remained at all-time highs (up 800% in the past two years) from Alt-A and Prime filling the void.

 

The problem here is that the Alt-A and Prime universes dwarf the subprime universe.  There are estimates that just the Pay Option ARM’s should default at 50% clip, which is higher than subprime.

 

Their peak resets do not happen until Dec 2009 then they flatten out for 10 months before dropping. So, the Pay Option Implosion will be with us for at least two years. These loans know no socio-economic boundaries and were the favorite in more affluent cities across the nation, especially in CA. So far in CA, we have only felt the Subprime Implosion and that has had devastating effects. The state can’t handle subsequent implosions of even greater magnitude but that is what we are going to get.

  

More defaults from even higher paper grades mean more pressure on the distressed asset market and ultimately the housing market. The banks in their overwhelming desire to hide their losses had been taking much longer to foreclose than they could, selling foreclosed homes very slowly so as not to take the hit.

 

MASSIVE LIQUIDATIONS

 

Your beloved FDIC has kick-started what will be massive bulk liquidations by banks, which presents a clear and present danger to housing. Recently, the FDIC’s Bair said she would liquidate IndyMac’s portfolio quickly. Since then, Merrill did sell, Fannie said they would sell 54k homes in bulk and Lehman is shopping $40 billion in ‘assets’, much of it residential.

 

The great ‘asset’ dump is upon us and this represents only a portion of real estate assets these banks will get back over the next many years.

“How can that be? The FDIC is offering us a plan that would make it so we can root against Washington Mutual (WMCramer’s TakeStockpickr) and know if that scourge of all lenders went under, we would have far fewer foreclosures because of the FDIC takeover. Also, once the loans are all under fixed rates or sent to the FHA for rehab — as the housing legislation makes clear will happen — we are going to see a dramatic decline in the rate of foreclosures.”

The new FHA Bailout Law is not all its cracked up to be Cramer. Quit reading the headlines…please.

The recidivism rate among modified subprime ARMs is so high because non-profits and servicers are just bad at qualifying people for mortgage loans and the borrower is even worse. There are professional loss mitigation firms out there such as Green Credit Solutions, who we at ML-Implode endorse, that have very high success ratios and very low recidivism rates.  Private loss mitigation could help but there are not enough qualified firms doing this.

The new FHA Bailout Law will not make for a significant decline in foreclosures. The current FHA default rate is approaching 20% and that is from the good FHA borrowers! This is before the new Bailout Law and all the worst of the worst borrowers are allowed to be run through FHA.

There is already a push back going on with the new FHA Bailout Law anyway. First, by the banks that are learning very quickly they will have to discount notes by up to 60% at least to get to that 90% LTV level or low debt-to-income ratio required. Second, by the FHA lenders who will be watched closely by FHA for default rates with this new group of loans and judged by ‘Compare Rates’. For example, if defaults exceed 150% of their historical average, they could lose their FHA approval! 

As troublesome for this new Law is the fact that most of these defaulted loans have a second mortgage and the second mortgage lender has to actually waive the debt in exchange for future equity in the property. 

In addition, people still have to qualify under relatively tight guidelines. My guess is less than 15% of all eligible borrowers can be helped through this new Law.  

You also have to consider that many may not want a new 8.5% FHA fixed rate loan with a 3% up-front and 1.5% annual mortgage insurance premium.  With a home still comes property taxes and insurance and it most cases the borrowers will learn that they can rent cheaper.   For many, their payment will be going up even with a principal reduction.

Why would they not rent when they are giving away 50-100% of the future appreciation in their home to the FHA and 25% to the second mortgage holder? Best case if they stay five years, they will get to share in 50% of the upside; 25% if they have a second mortgage the bank agrees to wipe out. It is simply better to rent.

“Now, right now, when we see this, we are skeptical. When Wells Fargo (WFCCramer’s TakeStockpickr) decided to give its borrowers more grace — the same grace that other banks give — we immediately figured it was a canard to mask things. But John Stumpf, the CEO, said it seemed like the right thing to do, and the bank would do better trying to work things out with lenders than throw them out on their butts. Instead, of course, the rate of foreclosures went down, and I bet ultimately the number of foreclosures will go lower.”

Cramer, he lied to you. THEY CAN’T FORECLOSURE. Think about it. He extended the definition of ‘default’ from 120-days to 180-days on his massive $84 billion Home Equity portfolio, not on the first mortgage portfolio. Second mortgages are in second position 95% of the time.  Values are down 35% on the median in CA for example, which is where Wells Fargo has the most exposure. Therefore, the vast MAJORITY of his Home Equity portfolio is in a negative-equity position and is unable to be foreclosed upon!  If they did foreclosure, the first mortgage holder gets it all.

Last month in CA another foreclosure record was set with nearly 30k people losing their home. This is up from 3k two years ago. Behind 80% of those foreclosures is a wiped out second mortgage and belonging to Wells, WaMu, Countrywide, CITI, Chase or Bank of America.  These are TOTAL wipe-outs through foreclosure where there is no recovery through foreclosure.  

“We need time. We need time to solve the housing depression. The elements of time play out positively, because we are a growth nation that cannot have as few homes built and as few homes bought as in 1991, when we had 248 million people in this country. We now have about 310 million people. We have more than 60 million more people in this country, and we are buying as many homes as we did back then? How long can that last?”

It can last many, many years Cramer because between 2002 and 2007 most who could buy did buy. A large percentage of those who had been owners before the bubble refinanced into risky loans or pulled all their cash for investments or to buy a second or rental home. By 2007 it seemed everyone was an owner.  Ownership rates were at an all time high. Now, all these people are stuck. Most that bought since 2004 are underwater and can’t sell or refi.

The only way to get all the inventory out of the system quickly is to unlock the boarders because of the American’s who did not buy from 2002-2007, a large percentage will never buy and a large percentage can never buy.

We do not ‘need time’. We need values of homes to fall to so that they become ‘affordable’ again and those who never bought can. They are far from it now especially since we have gone back in time 20-years in the mortgage finance arena.

Who is going to buy all these homes? Now, the target market for home purchases is the first time home buyer segment, which has always been historically the weakest segment of the market. The all-important ‘move-up’ buyer is almost non-existent. 

“The answer, of course, is that given the dramatic overbuilding and the foreclosed homes, the oversupply will take months to burn off. But not years. The trick is to restrict supply, which wasn’t being done by the homebuilders until last year, when they finally cut back the numbers — they are now building about half the homes they did in 2006. Then we need to make it easier for people who bought homes to stay in them, so far the hardest part of the equation. Given that 14 million people bought homes between 2005 and 2007, and half took exotic mortgages to pay them, I figured there was no way that more than 3.5 million people could lose their homes (half of the half that took the 2-and-28s and the pick-a-pays and all the other nonsense). That was wrong. I am now thinking that all — that’s right, 100% — of the people who bought homes between 2005 and 2007 are going to default. All of them! It makes too much sense not to given the home price declines.”

(I should have stopped reading after this one argument but decided to write this up anyway because by this point my jaw was hanging on the floor.)

Cramer, home builder supply is insignificant. Bank shadow inventory, coming foreclosure inventory already in the pipe, existing Ma and Pa Homeowner inventory and higher grade paper defaults beginning to surge now is where the real supply comes from. Home builder supply is a very small single digit percentage of the aforementioned supply, has always been ad will always be. The oversupply will take years if not a decades to burn off.

You base your conclusions off of 14 million people ‘BUYING’ homes from 2005-2007.  The purchase market was only part of the mortgage market and the SMALL part. What about all of the refinances?  Someone that refinanced into an exotic loan and perhaps pulled all of the cash out are at even a greater risk of default than those who bought and didn’t cash-out.

Remember, around 50% of all subprime and Alt-A loans during the bubble years were cash out refinances. Of the remaining, the majority were high-LTV rate and term refinances that are equally at risky due to values falling so much.

Also remember that interest only loans, stated income for wage earners and high-LTV deals were abundant in 2003. Values have fallen to such a degree those that bought in 2004 are in a negative-equity position and at an exponentially greater risk of loan default. So, you have to back up your time line to cover 5-years and not 3-years.

Your 14 million loans from 2005-07 covers only ONE THIRD of the mortgage during that time. When you add in 2003 and 2004, your 14 million only covers 20% of the loans made. Granted many of the 70 million total loans made were to the same borrower in a refinance transaction but this just proves the point that your numbers are totally off base and not representative whatsoever of the at-risk mortgage universe.

MASSIVE SUPPLY ABOUT TO HIT

Then there is the massive bank owned supply about to hit. The FDIC is dumping IndyMac’s foreclosures in bulk. Merrill just dumped $30 billion in CDO’s much with residential assets. Fannie just said they would bulk 54k foreclosed housing units. Lehman is selling $40 billion in ‘assets’ much of which is residential mortgage and housing. All banks are going to want to get ahead of these giants and sell. This will reduce prices of mortgage assets in the bulk market in turn reducing prices on the street when these homes make it to the market.

“That’s why we need the FDIC to own more banks and more banks like Wells to work it through and more money from the FHA. You can see how the system is being overwhelmed by the simple equation of demand vs. supply. In 2006, for example, 7 million homes changed hands. Slightly more than 2 million were new homes. In 2008, we get half the number of new homes being built, but we are going to regurgitate 3.5 million homes that foreclosed. That gives us 3.5 million more homes on the market than we need.”

I agree with you, banks need to do a 35% principal balance reduction at a minimum to get this problem solved over time. But in reality all existing home owners need to be re-qualified at 28/36 debt ratios going forward and be given a principal balance reduction, low fixed rate or combination of both to ensure this problem solved fast. Either that or bring back all of the exotic mortgages we lost and let the borrower lever up again.

If you only modify those in trouble, it puts pressure on those better borrowers who did nothing wrong. All around the nation, people who put 20% down and got fixed rate loans are sitting in their homes while values plummet around them and their neighborhood turns into a foreclosure zone. Over time foreclosure zones turn into neighborhoods that even the police won’t patrol. This is what will set off the ‘Prime Implosion’ that I feel is less than one year away from beginning in earnest.

“Historically, we get about 800,000 new homebuyers naturally in this country because of household formation demographics — marriages, divorces, kids and the like. If you believe they all bought new homes we would still have 3.7 million more homes than we need. That’s the real issue.”

Nobody cares about ‘new’ homes Cramer. We need to burn through and bank REO and ‘existing’ homes and let Joe and Jane Homeowner out. New Home Sales are a small part of the market and always have been. When Joe and Jane are stuck in their home and can’t sell or refinance because they owe so much more than the property is worth they are at an exponentially greater risk of loan default.

“So, if you attack the problem that way, you can see that anything that keeps people from getting foreclosed will cut back that 3.7 million, and anything that gets people to want to buy — tax credits for buys, lower prices for homes and perhaps a nationalization of Fannie (FNMCramer’s TakeStockpickr) and Freddie (FRECramer’s TakeStockpickr), which would reduce the price of money to buy homes — will work off the problem over time.”

Why again would nationalizing Fannie and Freddie make mortgage rates cheaper? Remember, if they nationalize these two and put their $5.2 trillion in exposure onto the US Gov’t and tax payer’s balance sheets, there is a strong chance Treasury yields will soar making borrowing costs higher for everyone across the board. I see where you are going with this ‘reduce the price of money’ but I don’t think you have fully thought it through.

“If you really wanted to get granular, you can chart out what happens rather easily. The default rate on homes spikes in the first two years, particularly these years, because of all of the fraud and recklessness. Two years ago was the height of the fraud, and it continued unabated for seven more months. Right now I would venture — we don’t have hard figures — that maybe a quarter of the defaults that will be part of the 7 million have already occurred. We’re going to get the rest of the three-quarters in the next seven months. The maximum pain is in these next seven months. Once the two years that began tolling at the end March of 2007 — the last of the really bad lending practices period — occurs, you simply cannot have more increases in homes being foreclosed on, because you didn’t have nearly as many purchases, and many of the corrupt lenders were flushed out.

Or in English, the problem peaks over the next seven months even without any intervention or stimulus or plans.”

Cramer, please remember that Subprime was only the ‘canary in the coal mine’ to the overall ‘Mortgage Implosion’. Arguably fraud is more pervasive in Alt-A, as 83% of the Alt-A universe was limited documentation loans such as stated income vs. 45% of subprime.

Besides that, we have learned very quickly that ‘negative-equity’ is the leading cause of loan default across the Alt-A and Prime universes, which dwarf subprime.

Seven months from now as we enter the spring selling season supply will be so out of control and values down so much that housing may not be viewed as anything but sticks and stucco.  Given building costs, land is already free in most of the harder hit areas in the nation.

Also remember from the time a borrower ‘defaults’ to the time the bank takes it back into foreclosure and its back on the street can be as long as nine months to a year. Just because a loan goes into ‘default’ does not mean the borrower moves out and the home can turned around. Far from it. Therefore, even if you are right and actual defaults stop in seven months the foreclosure overhang from that would last for another year at least.

I have to give you kudos though. Most of your ‘bottom’ calls over the past year have quicker time lines than seven months. At least this time you gave the readers seven months to forget this story was ever written. –Best Mr Mortgage 

 

 

42 Responses to “Cramer Calls Another Housing Bottom…Puh-leeeze. Enough is Enough!”

  1. What is the very best way to actually track the shadow inventory numbers?

    Why aren’t these numbers readily available in a democracy?

    Tony

  2. Tony, that would require something called full disclosure or transparency, neither of which are required by our financial firms in this country. In China and Russia for example it is even worse than that. In other words this country is pretty good at disclosing what it does actually disclose, even if that sucks at a time like right now. Not happening…

    Mr. M. I must tell you that was a brilliant rebutal! It is one thing to say something back as defense against something that was said stupidly, but an entirely diffrent thing to out right prove beyond a shadow (no pun intended) of a doubt why it was in fact stupid to say it. I am totally with you on this one and so is anyone paying any attention at all.

    P.S. I have been researching today to try and find out what is happening, and I must say it is awfully quiet out there today. Nary a whisper on Lehman and Freddie from what I have seen and / or heard today…

  3. its always most quiet before the storm Stu.

  4. I don’t watch CNBC anymore precisely because of Cramer & his ilk.
    Does anyone really believe that the MSM “analysts” are any more than “pump & dumpers” or hired cheerleaders?

    Excellent rebuttal.

  5. Mr. Mortgage, can you give me a little more detail on how the Alt-A and Prime universe will darwf the subprime universe?

  6. I have 2 questions:
    1. (similar to Todds) You keep saying that the alta/prime universe is bigger than subprime. I dont think I’ve ever seen actual numbers! Not that I dont believe you, I’d just like to see the actual numbers (and where you got them) for both ‘universes’

    2. Does a listing of NODs per zip code per month exist? Especially for those of us in SoCal – I think that’d be a fascinating way to track the AltA/Prime implosion. Seeing MoM rises in high end zip codes for X straight months would be hard to deny. Especially knowing the cure rate is ~20% (if that!)

  7. MM great work as always. Can you read the tea leaves and tell me where this whole thing ends up? Maybe I don’t want to know (cut to the chase 24 months from now).Thanks again

  8. Mr Mortgage posted this link, http://www.newyorkfed.org/regional/subprime.html

    I am just pulling CA numbers

    Subprime:
    Number of
    subprime loans
    457,863

    Average Balance: $324,092

    Alt-A:
    Number of
    Alt-A loans
    699,366

    Average Balance: $420,131

  9. The real estate market doesn’t turn on a dime like some stocks do after a press release. Cramer should stick to trying to manipulate stock and leave the real estate market alone.

  10. nfox:

    I have been researching and reporting the size of each universe and breaking each down into different loan types (ie: pay options as a percenatge of the Alt-A universe) since Dec 2006.

    Alt-A in CA for example is 50% large than subprime in unit could and 100% larger in dollar volume.

    Nationally unit count the Alt-A universe in 30% smaller yet 50% large by dollar volume.

    Dollar volume = bank losses.

    In my day job I provide real time research on loan banks and mortgage lenders and am the ony provider of data by bank on real time defaults and foreclosures. From that I can extrapolate very accurate loss estimates. I can even track wipes out second mortgages through the foreclosure process by bank depsite banks not actually foreclosing on second mortgages.

    I know my numbers and played heavy in the resi market for the past 20-year, especially during the past years.

  11. Hi Mark – 24 months from now supply is much greater than today, higher credit grades are in heavy default, housing is down double digit percentages from today as well as rents and the bottom is still not anywhere in sight.

  12. Todd, MrM – awesome. thank you!

  13. Cramer is just another Shillstein on Wall Street. Never do business with a Shillstein.

  14. MM do you see anything in this slump that looks the same as the 90′s reset. I know you are up north. Here in socal it appears there is a huge problem with jumbo, it is dead the only thing moving at all is conforming be it at a slow pace. The only market is 417k and below I live in coastal socal and everybody said it would not hit the prime areas. I call horse hockey on that one, lots of cracks in the foundation starting to show up here (REO’S) the exotics where the flavor of the month down here. Just wanted your thoughts. Thanks again for all the work you put in.

  15. FT reports 1,000 Billion subprime vs. 600 Billion Alt-A, but that is by no means the whole story. Prime, pay option and % alone wipe out the actual real dollar figure of failure… just saying.

  16. Cramer, he lied to you. THEY CAN’T FORECLOSURE. Think about it. He extended the definition of ‘default’ from 120-days to 180-days on his massive $84 billion Home Equity portfolio, not on the first mortgage portfolio. Second mortgages are in second position 95% of the time. Values are down 35% on the median in CA for example, which is where Wells Fargo has the most exposure. Therefore, the vast MAJORITY of his Home Equity portfolio is in a negative-equity position and is unable to be foreclosed upon! If they did foreclosure, the first mortgage holder gets it all.

    seems pretty obvious to me, just so I understand the 5% would be someone who owned his home free and clear but then took out a home equity loan?

  17. we all know that while fraud is a big factor, lender negligence and negative-equity are the leading contributors to loan default

    With all due respect Mr M., you’re wrong here. Lender negligence alone couldn’t make this mess, as it’s only an enabler. You need lender negligence mixed with fraud to actually create a bad loan. In those cases I have to ask, who do we punish? The idiot or the criminal?

    I’m not saying banks don’t deserve their pain, they most certainly do. But loose lending on its own is nothing, you need someone to come in and take advantage of it to create a problem. It’s not as if banks can force people into loans; people do it via their own free will (ignoring the few cases of true lender fraud – which should be punished severely).

  18. Jim Cramer and others on the financial cable channels are in denial. They don’t want to see the truth. “They can’t handle the truth.” They will not dig down to see the difference between ‘organic’ and other sales. They are looking for the bottom in order to call it. But, bottoms are only called after they have passed. Catching a falling knife or safe is not my idea of good timing.

    Perma-bulls do not easily turn into bears. While it is often the case that when the perma-bulls change into bears, a bottom has passed, this time is different (I know, watch out whenever someone says that.). There will be many bottom calls. And for some locations, this will be true, that is rents and prices come in line in those locations but not everywhere.

    For the broader market, in 2012 baby boomers will start turning 66 and qualify for full retirement benefits. In 2024 the peak boomers born in 1957 turn 68, and qualify (unless the law changes again and pushes out full retirement). There are going to be a lot of large houses for sale and many will retire ‘early’ (especially when full retirement is re-defined to 75).

    I cannot see a general bottom occurring before 2011. However, severely depressed and overbuilt areas such as parts of Florida or the Great Central Valley of California, could find a bottom in 2009 or 2010 as baby boomers buy here and sell their large houses in other areas. Remember, that many of these ‘large’ houses were bought before the boom and some of these boomers will exit early (before prices decline further) and buy cheap retirement properties in Florida and the Central Valley of California.

    Other areas could benefit such as Arkansas, Austin TX, San Antonio TX, South Carolina, etc. as retirees are looking for amenities but not jobs (although some will have to look for jobs).

    Bottom line, debt must either be service or defaulted on. It is clear that in the current crisis it can not be serviced, thus much will be defaulted on. And in a highly leveraged credit market, we call that ‘Deflation’.

  19. WELLS FARGO YOU ASK??

    Our marketable equity securities included approximately $2.5 billion of investments in perpetual preferred securities at June 30, 2008. These securities were issued by credit-worthy companies and underwent an extensive credit evaluation at purchase. They provide very attractive tax-equivalent yields and were current as to periodic distributions in accordance with their respective terms as of June 30, 2008. We have opportunistically increased our holdings in these securities over the past 12 months in response to increased yields available in the marketplace, driven by a significant widening in credit spreads caused by the “mortgage and credit crises.” The market value of our holdings in these securities declined during this period in direct correlation with the continued widening of credit spreads. Unlike common stock whose return is mostly in the form of price appreciation, these securities were purchased for their high yields, with purchase decisions underwritten like bonds and debt securities. We evaluated these securities for impairment in accordance with our policy and determined that they were not other-than-temporarily impaired as of June 30, 2008. Subsequent to June 30, 2008, in light of recent adverse developments that have affected the market value of certain perpetual preferred securities, including those issued by Fannie Mae and Freddie Mac, the market value of such securities have experienced significant volatility. We continue to believe that these investments are attractive over the long term and intend to hold them as core components of our investment portfolio. We will continue to evaluate the prospects for recovery in their market value in accordance with our policy for determining other-than-temporary impairment.

  20. 4North – exactly. I have one in first position a rental.

  21. “No, no, no, housing is fine.

    Do not pull your money out of housing.

    I repeat, housing is fine.”

    :)

  22. If you only modify those in trouble, it puts pressure on those better borrowers who did nothing wrong. All around the nation, people who put 20% down and got fixed rate loans are sitting in their homes while values plummet around them and their neighborhood turns into a foreclosure zone. Over time foreclosure zones turn into neighborhoods that even the police won’t patrol. This is what will set off the ‘Prime Implosion’ that I feel is less than one year away from beginning in earnest.

    This is so very, very true. I am in this situation. I can afford to make my mortgage payments, but why should I continue living in my neighborhood now that my neighbors all foreclosed and the units around me are filled with section-8 renters? Why should I stick around when I can rent for a year or two, and eventually get back into the market when the prices are even cheaper? I could get twice the home in a much better neighborhood if I mailed in my keys. There’s no incentive to watch struggling families get loans rewritten while because I pay my bills, I can’t have my loan rewritten.

  23. Earnings for the S&P 500 declined by 29% year on year, “The shift in earnings continues with Energy contributing 25.1% of the S&P 500′s operating earnings during the second quarter, up from 16.4% a year ago,” said Howard Silverblatt, S&P senior index analyst, in a statement. “Conversely, Financials have now posted their third consecutive quarter of negative earnings after accounting for 28.4% of operating earnings this time last year.”

    The markets seem to be holding up pretty well with such a massive decline in earnings. But wait, don’t worry “we’re still growing says the goverment”. No worries, it’s just a “mental recession”. yada yada yada…i wonder what the top govt officials smoked in college?

  24. So Cramer called a bottom…

    Let’s see what the numbers out today tell us (a tad more realistic than simply calling a bottom).

    Sales DECLINED by 13% YOY

    Median Prices DECLINED by 7.1% YOY

    Inventory ROSE to 11.2 months of supply (Matching the highest EVER!)

    I may be wrong, but wouldn’t a bottom see prices stabalizing and not near double digit declines?

    Wouldn’t sales be leveling off and not continuing to fall by double digit percentages?

    One more question for Mr. Cramer… How the heck does inventory climb if we are nearing a bottom?

    Shadow Inventory is alive and well, and coming to a neighborhood near YOU!!! Even you Mr. Cramer… even YOU!!!

  25. Because of the massive size of real estate markets–and not just in the U.S.–a bottom would/will take a long time to form and a much longer time to reverse. All Cramer is really calling is a trade implying you can invest. After WFC gets taken to the woodshed, stripped naked and whipped black and blue contemplate a bottom.

  26. bottoming of housing comes in 2010-2012, took from ’99 till mid 2006 for this housing bubble to inflate, so would take about an equivalent time to deflate i’d reckon.

  27. Cramer IMO is nothing more than a Crook who has a very good stage. Read this articleto learn who more about him and his buddies. http://www.deepcapture.com/jim-cramer-is-a-complicated-man/

    The FBI should be investigating him and his Friends.

  28. Buy a house in 2003 for $250,000, goes up in value 80% into early 2007. Value now $450,000, refinace at 80% LTV (being kind here), mtge is now $360,000. House goes down 40% in value from the $450,000, what is the house worth? $270,000. Remember folks a smaller % drop off a bigger number loses more money faster than most people realize. Of course people will walk as Mr. M points out. It is not the new home sales but those that refied into crap or even fixed rate. Remember the math. Goes up 100%, only needs to drop 50% to be back to where it began.

    Another point that not many discuss, how do the banks recognize the shortfall of interest income off of pay option arms? Anyone? They recognize it as current income even though they are not receiving it. So my $100,000 mtge goes neg-am to $120,000 and then I walk, they sell the house and take not only a hit on the potential loss of the house but now have to restate earnings for the previous 2-3 years because I never paid a dime of principal let alone did not pay the full amount of interest owed, yet they booked the full interest amount as income, WHOOPS. If you own $140 billion of this paper like Wachovia it can and will get very ugly. A double edged sword for the pay option ARM folks.

  29. Maybe Cramer is unduly influenced by his proximity to the New York City market where housing prices as yet have not declined at all. A typical two-bedroom apt. that cost $2,000,000 a year ago is now about $2,100,000. Interestingly, on a weighted average basis, US home prices have not declined nearly as much as median price numbers indicate since the weight of the $2 million + NYC apartments has dramaticily increased.

    What do yoy think is in store for NYC? Obviously NYC co-ops thatr require at least a 40% downpayment and liquid assets equal to the purchase price have not at all been affected by mortgage availability as banks still fight to offer these loans.

  30. <>

    I would agree with that. In fact, this study seems to indicate that fraud losses in Alt-A are more than 3 times that of “nonprime” loans. (I’m not sure exactly what “nonprime” means, though, it would appear to mean subprime in this context.)

    http://www.fbi.gov/publications/fraud/mortgage_fraud07.htm

    “BasePoint Analytics, a fraud analysis and consulting service, analyzed loans that were originated between 2002 and 2006; nearly 1 million Alt-A loans and 3 million nonprime loans were evaluated. The relative fraud-loss rate of Alt-A loans was more than three times higher than nonprime loans. Losses within Alt-A loans were caused by income misrepresentations, employment frauds, straw buyers, investor-related frauds, and occupancy frauds.”

  31. Sorry, I was referring to your quote above: “Arguably fraud is more pervasive in Alt-A, as 83% of the Alt-A universe was limited documentation loans such as stated income vs. 45% of subprime.”

  32. In my opinion the GSEs getting “Bailed Out” is a done deal. It is not a question of if, but rather when… What makes me really wonder about the intelligence of our investing public is what happened today. Let us take a look at the facts:

    1. China, Russia, and other foreign investors are shedding Billions in investments in Fannie and Freddie.

    2. American lenders are shedding Billions of their investments as well and are marking down values of what is left in their portfolios in some cases by as much as half it’s value. This is preferred stock folks…

    3. The Treasury already has permission from the Government and a blank check for up to 800 Billion for the “Bail Out”

    4. Freddie is broke, and by using general accounting standards they are defined as bankrupt. They have zero valuation left. Fannie is close to the same scenario and if forced to value holdings marked to market would equally be insolvent and broke. They are both done, over, caput, belly up, nothing left etc…

    5. Freddie raised a meager 2 Billion today and the market (investors) reacted as if they had just won powerball. The stocks in these two companies actually were elevated today by investors… seriously…

    What part do these ignorant investors not understand when the ensuing “Bail Out” (which is coming in my opinion much sooner than later) will wipe out investors monies. The preferred stock will become worthless people! ZERO, ZILCH, NATTA…

    ANY money invested in these two agencies you might as well just toss in the fire pit and burn. At least you would get heat out of that, which is more than you will get back from your investments in these agencies in my opinion.

    WHY? Why would someone invest their hard earned money into a company that is bankrupt? Why would someone knowingly throw their money into a situation where they are telling you UP FRONT that your investment will be WIPED OUT? They are letting you know BEFORE you do this that you WILL LOSE EVERYTHING!!!

    I just do not get the “Sheeple” mentatlity and I suppose that is a good thing if it means you have to be this dumb, naive, and stupid all at the same time…

    Whew… Boy I am glad I got that off of my chest!!!

  33. Stu, the “sheeple” mentality probably stems from evolution. The human brain isn’t wired for the truly random world we live in today. There are some great books on the subject of irrationality in investing, Mean markets and lizard brains comes to mind. This is an interesting article as well, Why we fail to see when we’re about to fail? http://www.forbes.com/2008/08/22/summer-reading-motorola-ent-manage-cx_kw_0822whartoncellphone.html seems we get attached to our opinions even in the face of changing events that are distinctly otherwise.

    The Elusive Obvious I call it.

  34. Cramer said that? Well what do you expect to hear from a bozo? Words of wisdom?

  35. I had to share…

    http://www.youtube.com/watch?v=712kRqri2No

  36. US consumer confidence is up for the 2nd month in a row!

  37. Viv, actually it is 3 months in a row, but don’t get too overly optimistic from the reading. Year over year data is much more compelling as to insight into these measures and last July the index stood at 111.9 vs. 56.9 today. The index is still nearly half of what it was only a year ago. The bench mark is 100 which means although over 50 means growth it is very little and volatile growth. Most of this is due to the “Sheeple” buying into the rhetoric being force fed them. We have just been teetering on the neutral spot of 50 for a while and it will probably stay that way for quite a while longer would be my guess. It also is affected by what is going on in the markets at the time of the survey. This week was a good spot with the Dem convention, Fannie / Freddie good news (if you believe the hype), Existing sales up (M/O/M and again if you believe the hype), Stock market up last week and some great spin and hype oozing from various corners in the markets. Nothing has changed to warrant any serious uptick in consumer confidence and nothing on the horizon looks to be enough to do it either. In fact a few things are on tap that could cause the reverse affect as in Lehman going under, Freddie and / or Fannie being bailed out, banks failing (9’th one yesterday went under this year), major price declines in housing or a continued rise in foreclosures and housing inventory along with unemployment rising. Many bad things could potentially alter this number in a hurry while few if any will allow it to gain any serious momentum…

  38. [...] Comments Stu on Cramer Calls Another Housing Bottom…Puh-leeeze. Enough is Enough!Viv on Cramer Calls Another Housing Bottom…Puh-leeeze. Enough is Enough!Stu on Cramer Calls [...]

  39. James Cramer just called (Tuesday) a housing bottom of June 30, 2009 on his Mad Money show completely ignorant of Alt-A. Except for that it would probably be a good call. His primary argument is that the stock prices of the seven biggest homebuilders bottomed a month ago and those prices precede major turns in housing markets by almost a year.

  40. Just checking Cramer’s weekend story in which he claimed six months and explicitly rejected a year. This is a quick switch.

  41. Cramer is a fraud, and is just trying to appear as if he is the worlds greatest gift to wall street because he was able to pick good stockes in a bull market……where was he during the past 8 -10 months

  42. to pick stocks I meant…….typo

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