Each month I do a foreclosure report for the state of CA.  CA makes up roughly 35% of the total unit count and 40-45% of the total dollar volume of all foreclosures in the nation.  ForeclosureRadar supplies the best data available and I add in my mojo each month. Below are the previous two months reports.

• Mr Mortgage: June CA Foreclosure Report…Conditions Arguably Worsen
• Mr Mortgage - RECORD-BREAKING MAY CA FORECLOSURE REPORT

Sean O’toole, CEO of Foreclosure Radar, was interviewed for a CNN Money story released today and spilled the beans early.  Since its now in the public domain I can let out the headline foreclosure data early.  Make sure to click that link and read the story.  It pertains to the new FHA bailout law and the $4 billion waste of money for states to rehab foreclosed houses.

July was another record month for foreclosures in the state of CA with all hell breaking lose and banks taking back roughly 26,500 homes for $12.5 billion.  ’Record-breaking’ is not a good thing in the foreclosure universe.  This 25% increase breaks all records ever posted and all foreclosure estimates. 

If past percentages hold true, next week when the national numbers are released by other data sources, the numbers should also show a similar increase.  However, not everyone gathers data the same way so I can’t guaranty what others will report.  If their data do mirror this report, I do not know how the markets will react to this but many times in the past, they have not responded very well to ’surging foreclosure rates’.

In May we passed $10 billion for the first time with $10.4 billion in loans, or roughly 24k homes, going back to the banks. In June, there were $10.2 billion in loans taken back by the banks, a slight drop.  This was an encouraging sign until July’s figures were tallied.

To clarify, when I say ‘loans taken back by banks’, these are actual foreclosures. When a home goes to the auction block the bank puts up the opening bid. If no 3rd party bidder comes in, the bank buys it back.  All year long in CA at least, banks have been buying back roughly 97-98% of all homes that go on the auction block.  That is an astounding figure in and of itself!

This $12.5 billion in foreclosures were from Notice-of-Defaults (NOD) from the February time frame.  It takes roughly 140 days in CA to go from NOD to foreclosure auction currently due to the back log. In Feb we had a drop in NOD’s to about 37k due to Feb being a short month.  But from March though June we saw NOD’s shoot back up to record levels of about 43k per month (see chart below). This means that the number and dollar amount of foreclosures from Sept through Oct at least should be even greater than July by 10-20% depending on fluctuating cure rates.

My official report will be out in a few days when I will have the final Notice-of-Default, Notice-of-Trustee sale and foreclosure sale figures.  I will also release my monthly YouTube video and forward analysis at that time. Until then. Best, Mr Mortgage

CA Housing Market Chart through June 2008. Please note this chart does NOT have July data, as it is not all available as of yet.

Other Related Mr Mortgage Stories

• Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche
• Mr Mortgage on Mortgage Modifications: You May Qualify!
• Mr Mortgage: Mortgage Modifications Part 2 - Being Forward Thinking
• Dr Martin Weiss Confirms Views on WaMu and Wachovia
• S&P Does Hatchet Job on Thousands of Prime, Alt-A and Subprime RMBS
• WaMu: Liquidity Options Running Low
• Mortgage Implosion Round 2: The ‘Pay Option ARM Imp
• Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs

Other than what I pointed out in the first paragraph, there are a few other small problems with this data release that you have to keep in mind. 

Home sales and pending home sales rising and prices falling is a bad thing. This is because for every person who gets a ‘deal’, perhaps 100 people with similar homes in the area have their home value slashed, putting them into an even deeper negative equity position and at an exponentially great risk of loan default. Remember, negative equity is a leading contributor of loan default. Today’s report showing prices falling tells me that a certain percentage were pushed over or ever closer to the default cliff.

When 40-50% of all sales come from the foreclosure stock, it is a bad thing because it drowns out the ‘organic’ sales (you and I) and does not clear organic existing inventory, which leads to loan default. (Please see my June Home Sales Report). Remember, only defaults on subprime are dropping but Alt-A and Prime defaults are climbing filling the void quickly. Pay Option ARMs are just beginning to implode and their hard-resets do not peak until Dec 2009 (Please see my most recent Option ARM report). In order to chew through inventory you have to sell more homes and have fewer new foreclosures. That is not happening to any great degree.

In a nutshell, in June this report showed pending home sales:

• rising slightly month-over-month
• flat from two months ago
• way down year-over-year
• prices continuing to crash

Remember, defaults and foreclosures have leveled off temporarily at historic highs and will likely increase once the selling season ends in Sept.

When it comes to home sales you have to look year-over-year and not month-over-month.  But even when you do look year-over-year, 2007 was such an anomaly you have to discount it sharply. This is because not only had values not come down very much from the all-time highs but there was also a lack of affordable exotic loan programs so widely used when prices were high. 

If you remember, the banks started doing away with low doc, low down payment, pay option arms, HELOCs to 100% etc in May/June/July of last year. Sales were unusually weak due to circumstances that can never repeat. Sales were so weak in 2007 due to near-peak high prices, a lack of financing and overall confusion in mortgage finance, you need to compare to 2006. From 2006 through June 2008, Pending Home Sales are down very significantly.  Take out the foreclosure resales and they have been cut in far more than half.

Lastly, many of the ‘pendings’ are short sales, which will never get approved. As a matter of fact, a study just came out of Santa Clara county, CA showing that between Sept 2007 and the end of March 2008, 2700 short sales were applied for and 77 approved. Perhaps it has gotten better since but I have no data on that. How many of today’s ‘pendings’ will never close because the short sale approval does not go through?

In a nutshell never read the headlines. The Pending Home Sales data set is absolutely irrelevant in this marketplace with so many wild cards and should be scrubbed immediately. - Best, Mr Mortgage

Other Related Mr Mortgage Stories

The Pay Option ARM (POA) is the most toxic of all loan programs with up to 80% of borrowers making the minimum monthly payment and acruing negative. Combine that with a house price crash of 32% in the past 13 months in CA and most of these borrowers owe more than their home is worth and are at an exponentially greater risk of loan default. Remember, these were once PRIME borrowers in many cases.

Part of my day job is analyzing banks and mortgage lenders using proprietary data and tracking mortgage loan defaults and REO by bank.  I can see near real-time what is happening on a bank level and it is not pretty. About four months ago I noticed the subprime defaults waning, which I have been telling all of you about ever since.  Over the past four months subprime defaults in CA are down about 25% but total Notice of Defaults have remained near historic highs of 43k per month. This is because Alt-A defaults have filled the gap.

The Alt-A universe is much larger in unit count and dollar volume than subprime so even though we are just at the beginning of the ‘Alt-A Implosion’, they have already filled in the subprime default void. Scarier yet, roughly 65% of all Alt-A defaults are POA’s. The ‘POA Implosion’ is upon us.

As a matter of fact, just last week S&P, Moody’s and Fitch all hit Alt-A hard with an emphasis on Pay Option ARMs. (Story Link).

Below is a few stories I have written on the topic lately.

• Moody’s & Fitch Join S&P in Massive Alt-A RMBS Downgrade Avalanche
• Dr Martin Weiss Confirms Views on WaMu and Wachovia
• S&P Does Hatchet Job on Thousands of Prime, Alt-A and Subprime RMBS
• WaMu: Liquidity Options Running Low
• Mortgage Implosion Round 2: The ‘Pay Option ARM Imp
• Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs

Below is an accelerated recast schedule for the POA. You can see how the recast numbers have just begun to grow and do not peak until Dec 2009!

The Wall Street Journal just came out with a story about how First Federal has been hurt badly due to the POA.  It has already been a leading contributer in the take-down of American Home, IndyMac, Countrywide and arguably Bear Stearns. If not for this loan WaMu, Wachovia, Lehman, Downey Savings, Bank United and Capital One would be in much better shape than they are today.

The Journal’s great story  about First Fed tells everything you need to know about this nightmare. Below is a recap. -Best Mr Mortgage

• Forty percent of its borrowers became at least 30 days delinquent after the payments on their adjustable-rate mortgages were recast.
• The number of foreclosed homes held by the bank doubled in the second quarter from the first quarter.
• the Los Angeles bank (First Fed)  is on the front lines of what could be the next big mortgage debacle: payment option mortgages.
• These loans went mainly to people with good credit, but they are likely to experience defaults that are nearly as high as — in some cases higher than — those for subprime.
• Barclays Capital estimates that as many as 45% of option ARMs originated in 2006 and 2007 could wind up in default.
• UBS AG, suggests that defaults on option ARMs originated in 2006 could be as high as 48%, slightly higher than its estimate for defaults on subprime loans.
• FirstFed’s experience highlights the challenges lenders face as option ARMs recast.
• FirstFed is a relatively small lender, with just $7.2 billion in assets.
• option ARMs were “a very good loan for the borrower and the bank” for more than 20 years. But that changed, she said, when investment-banking firms entered the industry and set lower lending standards, which FirstFed and others followed.
• As long as interest rates were flat or falling, the minimum payment was enough to cover the interest due, making the option ARM equivalent to an interest-only loan in the early years of the mortgage.
• As competition increased, lenders dropped the introductory rate on option ARMs to 1% or even lower and made more loans to borrowers who didn’t fully document their income or assets.
• Rather than shut its doors, FirstFed joined the crowd and business boomed.
• borrowers making the minimum payment weren’t covering even the interest due.
• Others lenders are seeing borrowers fall behind even before recasts.
• FirstFed is scrambling to modify the loans of borrowers who can’t afford the higher payments.
• Instead of waiting for borrowers to fall behind, the company sends borrowers letters as their loan balances swell, offering them a chance to modify their mortgages. From January through June, the company had modified 705 loans totaling $345 million.
• Many borrowers took out home-equity loans with other lenders after getting an option ARM from FirstFed.
• Many borrowers submitted loan applications that overstated their financial condition. ”You expect a 20% fudge. You don’t expect 500%.”
• Frederick Cannon, an analyst with Keefe, Bruyette & Woods, believes the company should be “well enough capitalized” to absorb the losses.

One thing Moody’s mentioned that is very concerning and worth remembering… “due to low current credit enhancement levels relative to current pool projected losses”.  This brings forward a variety of questions.

Remember folks, this is how the real pain of the ’Subprime Implosion’ began; with the downgrades of thousands of subprime RMBS last year. Only now are they finally acknowledging the losses. Although the raters have been pecking on Alt-A and Jumbo Prime for months, this is the first we are seeing of large scale higher-grade RMBS downgrades across the raters.  

This is so large-scale and across so many different paper types and banks, I think all three leading raters coming out in the same week is a fairly significant development. Especially given that the Alt-A universe alone dwarfs subprime. When you throw in Jumbo Prime and lower grade conventional prime all previous loss estimates can be thrown out the window. 

Everyone seems to think Merrill’s subprime CDO sale marks the bottom of the write-down crisis.  I don’t think so but even if it does mark the bottom of the ’subprime’ CDO crisis.  Say ‘hello’ to Alt-a and Prime.

Keep in mind, most of the new downgrades you are seeing do not include Home Equity loans (HELOC) or RMBS, which are widely thought to be ‘unratable’. As a matter of fact, on May 2nd S&P announced they have STOPPED rating them  all together citing “anomalous and unprecedented borrower behavior”.  There are $1.1 to $1.3 TRILLION in second mortgages on bank’s balance sheet mostly still owned by the originating banks.  But we will leave this crisis for another story.

Of the stand outs, Goldman Sachs, Bank of America, Chase, Lehman, Deutsche, Merrill, WaMu and CITI were mentioned often.  And in looking at the deals, many consist of Pay Option ARMs, which in my opinion were the most toxic loan every created. 

Judging by my data and research, I believe that ‘Pay Option ARM Implosion’ is upon us.  It is the next phase in the overall ’mortgage implosion’ and could make the ‘Subprime Implosion’ look like a walk in the park. On July 17th, I posted some good info on the upcoming ‘Pay Option Implosion’ if you need a review on the topic. Also, directly below is a current accelerated Pay Option ARM reset schedule.  As you can see resets have just started to spike and there is a year and a half to go until the peak.

This massive sweep also consisted of Commercial mortgages but you have to check out that for yourself at Mortgage Daily. Below are the residential deals hit. Notice how some stretch back in time to 2002 and one to 1998…nothing is sacred:

Fitch Ratings downgraded classes of the following Alt-A RMBS:

• First Horizon transactions issued from 2003 to 20072;
• First Horizon Alternative RMBS from 2006 and 2007;
• Mortgage Asset Securitization Transactions Inc. deals securitized in 2003 and 2004;
• ABN AMRO deals from 2002 and 2003;
• RALI issuances from 1999 through 2004;
• MLMI RMBS from 2003 and 2005;
• MLMI MLCC securitizations from 2003 and 2004;
• WAMU transactions from 2002, 2003 and 2004;
• Bear Stearns ARM Trust deals from 2006 and 2007;
• CWMBS issuances from 1998 through 2004;
• Sequoia Mortgage Funding Corp RMBS from 2003 and 2004;
• Sequoia Mortgage Trust 10, 11 and 5;
• GMAC Mortgage deals from 2005 and 2006;
• HALO 2007-AR1 and 2007-AR2;
• HSI Asset Loan Obligation Trust 2007-2;
• IndyMac IMSC issuances from 2006 and 2007;
• IndyMac MBS RAST securitizations from 2006 and 2007;
• J.P. Morgan Alternative Loan Trust RMBS issued from 2005 to 2007;
• Lehman Mortgage Trus transactions from 2006 and 2007;
• PHHMC 2007-2, 2005-2, 2006-2, 2005-6, 2006-1 and 2006-4;
• Alternative Loan Trust transactions from 2007;
• American Home Mortgage Assets Trust RMBS from 2005 and 2006;
• BA Mortgage issuances from 2003;
• Banc of America deals from 2003 and 2004;
• CitiGroup Mortgage Loan Trust transactions from 2004 through 2007;
• CWALT RMBS securitized in 2005, 2006 and 2007;
• CWMBS issuances from 2006;
• Deutsche Alt-A Securities Mortgage Loan Trust issued in 2006 and 2007;
• Banc of America ALT RMBS from 2006 and 2007;
• Banc of America Funding deals from 2005 through 2007;
• Banc of America Funding Corporation issuances from 2007;
• CitiMortgage Alternative Loan Trust transactions from 2006 and 2007;
• Merrill Lynch Mortgage Backed Securities Trust deals issued in 2007;
• Prime Mortgage Trust transactions from 2006 and 2007;
• RFMSI RMBS issued in 2005, 2006 and 2007;
• STARM deals from 2007; and
• WaMu Mortgage Pass-Through Certificates from 2007.

READ THE FOLLOWING BOLD/UNDERLINED TYPE VERY CAREFULLY:

Moody’s Investors Service downgraded five certificates from two GSAMP Mortgage Loan Trust transactions issued in 2002 and 2004 due to low current credit enhancement levels relative to current pool projected losses.

Moody’s also did some Alt-A downgrading due to higher-than-anticipated rates of delinquency, foreclosure, and REO in the underlying collateral relative to credit enhancement levels. Classes from the following deals were impacted:

• 177 tranches from 19 Deutsche Bank transactions securitized from 2005 through 2007;
• 108 tranches from 16 GSAA securitizations from 2005 to 2007;
• 89 classes from 13 Bear Stearns issuances from 2005 through 2007;
• 42 tranches from 14 First Horizon deals from 2005, 2006 and 2007; and
• 23 classes from MortgageIT Mortgage Loan Trust, series 2006-1 and 2007-1.

Finally, Moody’s downgraded 55 tranches from 10 scratch-and-dent deals from the Structured Asset Securities Corporation GEL shelf because many scratch-and-dent pools originated since 2004 are exhibiting higher-than-expected rates of delinquency, foreclosure, and REO. The SASCO transactions were issued from 2005 to 2007.”

Where We Are Headed and Downgrade Rationale

House prices have fallen off of a cliff in the past year, especially in CA where according to DataQuick the median price is off 32% since last summer.  This will lead to many more defaults across all borrower types due to the ‘negative equity effect’.  Now in the past week all ‘Big 3′ raters finally took this, among other factors, into consideration and slashed ratings in a big way. (less than 1-month ago S&P affirmed the same ratings).

This is the first summer selling season without exotic loan types such as Pay Option ARMs, second mortgages to 100% CLTV, Stated income/stated assets, aggressive intermediate-term ARMs etc to drive affordability meaning this summer selling season should end up considerably weaker than expectations and previous years.

Sales, while climbing ever so slightly over the past few months, are actually flat to falling when you take out foreclosure-related sales, which made up some 42% of the entire CA home sales market last month. When stripping out foreclosure-related sales ‘organic’ sales for June were at a multi-decade low and not even at the pace of new foreclosures. Please see my June CA Home Sales Reportand June CA Foreclosure Report .

Subprime foreclosures have leveled off and began to decline slightly but Alt-A defaults, which lead foreclosures by 4-6 months are surging led by Pay Option ARMs. The New York Times confirmed this is happening with a front page Business Section story on the topic today.

In response to the obvious continued house price depreciation and a surge in defaults awaiting heavy Jumbo Prime and Alt-A regions once summer seasonal demand stops in Aug/Sept, the raters are jumping ahead for once and downgrading a plethora of Alt-A, Jumbo Prime and Subprime RMBS so they are not left flat-footed as with subprime.

The raters are finally understanding the mortgage loan and affordability void left when everyone other than Fannie, Freddie and Ginnie pulled out of the market and the ominous impact that negative equity has across all loan types and borrower grades. Negative equity knows no bounds.  

While factoring in the unprecedented home price deprecation seen in the past 12-months and projecting that out, they are discovering that those who purchased a home as early as 2004 are now under water and at an exponentially greater risk of default.  Even many who purchased much earlier than that and put a second mortgage on the property are in a negative equity position.  This is making their modeling systems ‘TILT’.  Due to this I believe we will see even more serious ratings actions over the next 90-days stretching deep into the heart of the ‘Prime’ loan sector.

S&P also focuses in more closely this time around on later vintages from 06-07. This is not so great for those thinking that later vintages are ‘better’ such as those reporting that the Merrill CDOs sold for pennies on the dollar were ‘worse’ because they consisted heavily of 2005 and prior.

In my opinion, 2005 and prior are BETTER than 2006-2007 because underwriting standards were better and those that bought their homes in 2005 and prior and did not cash out since, owe closer to the current value of their home and therefore are in less of a negative equity position.

This story may only be getting started…again - Best Mr Mortgage

Other Related Mr Mortgage Reports

S&P Does Hatchet Job on Prime, Alt-A and Subprime RMBS

Mr Mortgage: June CA Home Sales Report

Mr Mortgage: June CA Foreclosure Report

Mr Mortgage: Mortgage Implosion Round 2: The Pay Option ARM

Fannie/Freddie: Massively Underestimated Risks

MGIC, following in the footsteps of most of their competition, reduced the allowable loan-to-value (LTV) ratios for mortgage insurance in CA, NV, AZ and FL to 90% effective today from 95%.  (Please see state restriction memo). 

If the remaining two mortgage insurers who allow over 90% in these states, Radian and RMIC, follow MGIC’s lead it would further depress their housing markets because it requires all borrowers to put more money down on purchases or bring in more money on refinances.  GE, UGI, Genworth and PMI only go to 90% and Radian and RMIC are smaller companies, so it is not inconceivable that they will not want to be the last ones on the block doing high LTV deals and soon follow suit. 

This past May Fannie and Freddie said they are ‘doing away with their declining value’ restrictions nationally. Until this time, the Agencies had reduced maximum allowable LTV’s in areas they deemed to be ‘declining’ to 90%, which just so happened to include these four states.  This move to remove the restrictions was cheered by the press, Solon’s, real estate professionals and Wall Street as being a critical piece in saving the housing market.

This is another perfect example of why you can’t read the headlines. Even though Fannie and Freddie may still allow 95% LTV in CA, NV, AZ and FL unless the mortgage insurers will them, the lenders can’t originate them and it is of no benefit to the housing market.

These states need EXPANDED guidelines, not contracted. This MGIC news means that many lenders who use MGIC as their primary mortgage insurer will have to scale back their loan offerings in response or use Radian and RMIC, which are the only remaining companies left writing policies in these states up to the Fannie/Freddie maximum allowable LTV.

The question is, will Radian and RMIC who are smaller companies want all of this risky spill over business or will they follow the big boys out of high LTV loan arena.  In addition, given their smaller size will the  banks want to take on the counter-party risk in doing business with these firms.  If these companies fail, then the banks would be on the hook for the defaulted loans. Time will tell.

Due to the fact that most of the mortgage business from 90.01% and up in four states with the largest real estate market rides on the shoulders of these firms, we will keep a close eye on Radian and RMIC, that’s for sure.-Best Mr Mortgage

New MGIC Restricted States Parameters for CA, NV, AZ and FL

This is not the exception, this is the rule now. Mortgage lending choices have all but dried up and when that happens and fewer companies control more of the market, program variety, rates and ultimately the overall housing market will suffer as a result. The housing market can’t handle fewer loan choices right now, it needs to have expanded choices.

At this time, this story only surrounds the Chase wholesale (broker) business, but typically that is only where it starts.  Then, a few months down the line the banks do the same in their retail channel. Case in point recently is with SunTrust partially shutting down wholesale Hone Equity lending in May and the entire thing late in July.

During the bubble years, Chase was a formidable foe in retail, wholesale and correspondent mortgage lending.  It was a major Prime, Jumbo, Alt-A, Subprime and HELOC lender. And despite what people think, Chase has significant ’at-risk’ on balance sheet residential mortgage loan exposure. 

For some reason Wall Street and the media at large do not think that Chase, Wells Fargo and US Bank did risky or exotic .  Nothing could be further from reality.  For example, other than agency loans that were sold off, portfolio subprime first and second mortgages were US Bank’s trademark with 100% CLTV second mortgages with scores as low as 580 being available until only recently. 

If you have ever wondered what the $10s of billions of on-balance sheet ’MBS for sale’ and whole loan firsts and seconds consists of, much most likely is their portfolio subprime products.  I am sure you already know about Wells Fargo’s $84 billion in second mortgages worth pennies on the dollar.  Like US Bank, their at-risk mortgage exposure dwarfs their shareholder equity.  Chase has similar on-balance sheet at-risk mortgage exposure but one big difference is thier overall size of course.

According to my extensive personal research on mortgage defaults and foreclosures by bank, Chase is currently ranked #5 of all lenders for Notices-of-Default and homes not sold and taken back at foreclosure auctions year-to-date in the State of CA.  To put that in context, lender’s #1 through #4 and #6 through #10 is a ‘who’s who’ of headline leading troubled banks.

On Friday, Chase announced to its approved mortgage brokers nationally that it will stop offering portfolio Jumbo loan programs through its wholesale channel and only offer Agency (Fannie/Freddie) product.  Granted, demand for all jumbo product, including Agency, in abysmal even in CA where it is needed the most but Chase backing out surprised many. 

Up until now, Chase was one of the last remaining banks offering products considered to be ’risky’ and/or ‘exotic’ on the broker level.  For example, they were one of the last doing Subprime and Home Equity Loans/Lines of Credit (HELOC), both of which were eliminated in May 2008.  In June 2008 they eliminated limited documentation products through its correspondent channel and January 2008 they eliminated their Alt-A programs.

“Impacted products include the Super Jumbo feature; non-Agency Premier Program, non-Agency Signature Series Streamline Purchase, no cash-out and cash-out refi’s currently available on market types 623, 603, 510, 516, 517, and 513, and non-Agency Lender Paid Mortgage Insurance currently available on market type 603.”

“Any remaining non-Agency loans must be registered by 8/3 and delivered to underwriting by 8/31. The last day to close and fund non-Agency loans is 9/15. No lock extension, renegotiations or extensions of credit documentation expiration dates will be granted.”

Needless to say, Chase originated some of the worst performing loan types far longer than most banks, which may just come back to cause problems in the end.  To be honest, as a direct competitor to Chase for many years including the bubble years, I am surprised that they haven’t admitted to major problems yet.  This is because they absolutely did the exact same loan types during the bubble years so many other banks have lost so much on; just more of them than most.

I have always said that banks just don’t stop doing loan programs if they are profitable and not experiencing problems.  Chase agrees.

“Chase attributed the decision to a dramatic decline in jumbo volume during the past six months, a lack of demand in the capital markets for jumbo products and worse-than-expected delinquency on bigger loans.”

Best,

Mr Mortgage

From Nov 2006 when Own-It Mortgage Solutions (the first national subprime lender to fail) went down and prices for subprime whole loans, bulks and MBS began to drop I have been vigorously following this story and reporting to you the facts from an insiders point of view.

I have always tried to stay ahead of the story and the ratings agencies in order to give you an advantage whether you are a home owner or trader.  Over the past year and a half, Cramer and I have mostly been on different ends of the field on the subject.  Honestly it drove me crazy sometimes.  For example, mid-last year I put out a research piece on how Pay Option ARMs would be major trouble in 2008 and he told everyone to buy the Pay Option lenders stock within a week of my report.

As a matter of fact around the time of the ‘rant’ he was suggesting to buy banks and writing DSL (Downey Savings) on his knuckles saying it would go to $100 for nearly a month.

This post is not necessarily to bash Cramer, but rather to give you the facts and show to you once again how much of the mainstream media distorts the truth and how you can’t take everything that they report at face value.  Also, showing his ’predictions’ over the past year in this manner really makes ya go ‘huh?’.  It is incredible. 

The pumpers think they are helping people by bashing shorts and always painting the best possible picture of a company.  What they do not realize is that they are not hurting the shorts, but rather the longs who buy the stock on the pump and lose nearly every time when it comes crashing back to Earth a short period of time later under its own terrible fundamentals in the case with many financials.  

Below is a listing of Cramer’s calls for the past 15-months. Your Money  has been diligent in keeping up with the Cramer Variety Hour.  This is Cramer’s resume, not a  6-minute soundbite in August when his sentiment changed literally overnight for some strange reason and he got lucky.

In all fairness, he has made some decent calls macro calls such as crude going to $150 and the DOW hitting 14,500 last year amidst the housing market crash backdrop.  But in this post I wanted to focus on the daily/bad single issue call in the financials and short-term market timing predictions that can crush an individual investor.  

It is a quick read but by the end you will feel nauseous and have a headache, that I can promise. -Best Mr Mortgage

CRAMER’S RESUME (In March 2007 subprime was big headlines due to New Century, Fremont, NovaStar etc failing. Everyone was calling it ‘contained’ and the losses would not go past a few non-bank greedy mortgage lenders)

**AUGUST 07, 2007 - The ‘Rant’. What the heck happened from July 27th?  http://allday.msnbc.msn.com/archive/2007/08/07/307269.aspx 

http://online.barrons.com/article/SB121763156934206007.html?

For those of you without a Barron’s subsrciption, go to TickerForums… http://www.tickerforum.org/cgi-ticker/akcs-www?post=54998

The Journal wrote a great piece on HELOC’s tonight specifically mentioning Wells Fargo, First Horizon and Fifth-Third:

Many (banks) who were caught flat-footed when these loans turned sour now assume that home-equity loan risk already is factored into bank stock prices, which have tumbled. But investors may be too upbeat once again. For one thing, the recent news isn’t exactly uplifting: 2.22% of all home-equity loans were charged off by banks in the second quarter, an all-time high. That is up from 1.69% in the first quarter and 0.9% in the fourth quarter of last year. Tax refunds and government-issued stimulus checks likely are at least partly responsible for why things aren’t worse.

Using this stance, investors should use caution when it comes to First Horizon National. According to a Goldman analysis, 15% of First Horizon’s home-equity loans, or 5% of all its loans, were made by outside parties. Outsider-written loans represented 22% of Fifth Third Bancorp’s portfolio, or 3% of its total loans. And 14% of Wells Fargo’s home loans, or 3% of total loans, were written by third parties.

These three banks also have a relatively high number of home-equity loans that are at least 90% of the value of the underlying houses, which is worrisome. Some investors also are concerned about E*Trade, which bought almost all of the home-equity loans on its book.

In addition, if you want a run down on the banks with the greatest Home Equity exposure, Fitch put out a great report a few months back entitled Big Bank’s Home Equity Woes.

HELOCs were widely kept by the banks and not securitized and sold like most first mortgages. In addition, most HELOCs are not secured by the property any longer because values dropping so much since the time the loans were originated. Most were originated between 2005-2007 and the average LTV was over 80% at the time of origination. Values are down 32% in CA in the past 12-months in CA for example, so you can see the problem. THEY CAN’T FORECLOSE! If they do, the first mortgage holder gets it all, leaving the second lien holder high and dry.

This following is anecdotal evidence, but worth noting.

A friend has a first mortgage at with a national big-name bank and Home Equity Line of Credit through BofA. He bought the home for $900k with 20% down ($720k loan) a year and a half ago. Shortly after the purchase he did a cash out refi for $840k then put a 95% $155k+ HELOC on the property using “current value,” which was allowed at the time. This goes to show how lax lending was in 2006-2007.

Within months of the purchase he was able to pull out all of his total down payment plus $100k when you combine the first and second. He now has total liens of $1,005,000 on a property that was purchased for $910k a year and a half ago and with a current value of approx $895k.

For those of you who are not aware, on first mortgages and HELOCs it was common for banks to allow a new appraisal for valuation purposes and not rely on the purchase price even if the new value was considerably higher. At many banks, this could be done immediately following a purchase. I am not sure what BofA’s policy was at the time, but obviously he was allowed to put a HELOC of $100k greater than the purchase price of the home not long after the original purchase.

As of a few weeks ago, he had not used all of the line and was worried about BofA shutting it down like most other banks have done. The money was his “rainy day fund.” So, he went to a BofA branch and pulled a cashier’s check for $100k and maxed-out the line. The manager had to come out and sign off and she even put him through a light question and answer session. He said she acted a little “concerned.”

Regardless, what the heck is BofA doing allowing a borrower to take out $100k cash on an essentially an UNSECURED Home Equity Line of Credit to 111% CLTV in this market? The borrower is “prime” when looking at his credit score but is salaried in a profession that does not support a million dollars in loans. In addition, he does not have a banking relationship with BofA of any kind. All that he has is a big, fat, open, fully accessible HELOC to 111% of present value.

Values are dropping so fast the banks can’t keep up with it so in the past six months most large-named banks have shut their borrowers out from accessing available credit in what they deemed “declining value” regions. That is most of American now days.

The question I have to ask is if BofA is this far behind the risk curve when it comes to HELOCs, which are front and center, what else are they dropping the ball on? The HELOC issue should be a no-brainer.

I am certain BofA will shut down most HELOCs in the near future, they would be foolish not to. Until that day, the smart ones will continue to max out their HELOCs and in many cases will never have to repay the money. - Best, Mr Mortgage

Other Related Mr Mortgage Reports

Dr Martin Weiss confirms Negative Outlook on WaMu and Wachovia

S&P Does Hatchet Job on Prime, Alt-A and Subprime RMBS

Mr Mortgage: June CA Home Sales Report

Mr Mortgage: June CA Foreclosure Report

Mr Mortgage: Mortgage Implosion Round 2: The Pay Option ARM

Fannie/Freddie: Massively Underestimated Risks

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Nobody BOUGHT $500 million in stock (they actually paid much more than that!) I chose the headline for the story to get more people to read the real stories herein.

This ‘investor’ now owns around $500 million at today’s price, but this is not their first buy. They are significantly underwater in their total WaMu trade.  The only reason I even care about this story is because of the irresponsible ‘journalism’ by CNBC for an hour calling this deal ‘incredible’, speculating about how great this is for WaMu and flashing ‘Alerts’ every other minute. If shorts get penalized for stock market manipulation, why aren’t actions like this punished? 

Today’s relentless cheerleading coverage of this non-event was not only irresponsible but lacked research and any sense of understanding of the stock market and how larger investors operate.  This fund added to their underwater position, which triggered an SEC filing. Simple.

It is actions like this by the press that hurts all investors, especially those buying the stock on the breaking hype in most cases. In trying to uncover a story first and always presentING the ‘glass half full’ they did their best to make this sound as if this was a game changer for WaMu. This spiked the share price for 15 minutes and everyone who chased the stock up were red by the end of the day.

This ‘news’ means absolutely nothing. WaMu does not get one penny. Toscafund is already in WaMu. They bought at a much higher price in the past and as part of the $7 billion capital raise a few months back. They did not buy 105 million shares today, yesterday or even last month. 

“Tosca has had poor performance, falling by more than 15 per cent in the year to the end of May thanks to a bet that banks and housebuilders would recover. But three investors said they expected losses from Wednesday’s sharp share price moves to be at least partially offset by successful short positions held by the fund. “It looks like they are taking a big beating, whatever the reason is,” one said.

Shares hit badly where Tosca is known or thought to have a large stake include Aberdeen Asset Management, Royal Bank of Scotland, Redrow and Taylor Wimpey. Redrow fell almost 19 per cent, Aberdeen and RBS lost 9 per cent and Taylor Wimpey 19 per cent. But one holding, Amec, rose slightly.”

Even if WaMu were to get all of this whopping $500 million (this is not the case), they LOST SEVEN TIMES that in the last quarter alone. Dozens of other funds including Tosca have invested $10S of millions or more all the way down from $40.

CBNC has turned into a no substance variety show that is only out to get a response with shock and awe headlines that mean nothing. Sorry for the rant, but what is going on is absolutely irresponsible ‘journalism’ that should not be taken seriously.

The constant misreporting of events to spin them into something they are not is just as bad as negative rumors. I am not short WaMu but may enter via puts if it goes any higher.

If you want the TRUTH on WaMu read these:

WaMu: Liquidity Options Running Low

WaMu: Martin Weiss Confirms Views on WaMu and Wachovia

-Best Mr Mortgage

DOW JONES NEWSWIRES

Toscafund Asset Management LLP on Thursday reported holding a 6% passive stake in Washington Mutual Inc. (WM), according to a Schedule 13G filed with the Securities and Exchange Commission.

Toscafund beneficially held about 105.5 million shares of Washington Mutual as of July 16, Thursday’s SEC filing said.

Toscafund also reported holding a 5.1% passive stake in Sovereign Bancorp Inc. (SOV), according to a separate filing Thursday.

The stakes were reported on forms for passive investors, or those who don’t seek to change or influence a company.

Shares of Washington Mutual, the nation’s largest thrift, were trading Thursday afternoon at $5.12, up 38 cents, or 8%. Shares of Sovereign Bancorp were trading at $9.69, up 7 cents.