Financials Look Bad, but We'll Get Through

An orderly decline, not a rout, in the bank stocks is actually a good thing. Yesterday really freaked out a lot of people and reminded us that we are going to have to worry again about Lehman (LEH - commentary - Cramer's Take) and Merrill (MER - commentary - Cramer's Take) and AIG (AIG - commentary - Cramer's Take), the ones that we actually know the least about. These are just too easily routed, and it isn't like Merrill and Lehman are having a good quarter. I am still very concerned about Lehman's exposure to Europe, which isn't quantified.

Needless to say, the big short-squeeze name, FirstFed Financial (FED - commentary - Cramer's Take), bothers me, and I am not a fan of Downey (DSL - commentary - Cramer's Take), which could be next. I write the latter because the nonperformers are so high.

Yet when I watched the Realtytrak guy this morning and looked at the foreclosure numbers, I didn't think that things weren't nearly as bad as the headlines. Of course, foreclosures are at a high; we are annualizing the worst vintage, the mid-2006 vintage, which as the premier no-money-down moment. We also have had a big spike in mortgages.

But from here on in, the bad mortgages peak, home construction declines dramatically and the Federal Housing Administration gets involved with $300 billion that Bank of America (BAC - commentary - Cramer's Take) and Wells Fargo (WFC - commentary - Cramer's Take) can direct borrowers to. I am really concerned about home equity loans and foreclosures, but those are now more prone to workouts.

The people in their homes past this moment will fight to keep their homes no matter what, and the worst spike in foreclosures is same old same old: parts of California, Ft. Lauderdale and Phoenix. Those areas are proving intractable, but the good news is that they are areas that people actually want to live in, and bargains are being created.

When you have something like one in 170 mortgages failing, you really should not be panicking. It's just not that bad, and you know I have been a bear on the housing group.

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