Memo Puts Mortgage Pain in Stark Perspective

How bad is it out the in housing? It's difficult to say, because we know that once you start recognizing the problem, they say that you are nearing a solution. But one of our terrific readers sent me this note over the weekend, which is a reality check to everything, acknowledging the cordoning off of whole areas around the country for mortgages.

Who can do such a thing? The buyers? The sellers? The realtors? No, the personal mortgage insurers who were there to protect the banks from deadbeats but are themselves under siege.

Last week they sent out this memo. When you overlay this list with the grades that Bob Toll gave the markets he is in last week on the Toll Brothers (TOL - commentary - Cramer's Take) call, you know that we aren't done lowering rates if we intend to beat this problem.

There are several components to affordability, including the declining house price, mortgage money availability, household income and the price of the mortgage. We've got declining prices and steady household income -- so far -- but rates are still too high to move the needle on the 30-year fixed. (And yes, I still believe the rate would go down on a cut.) But this memo cuts to the availability of funds in the areas that are most needed. Without still-lower rates we will not be able to reduce the overhang in these markets, and you can expect that things will only get worse, not better.

Of course, price could cure everything, and perhaps that's the solution the Fed wants. Price, however, comes with a cost, and that cost is default, bankruptcy, foreclosure on the part of those already in homes, NOT just losses from the homebuilders trying to sell them.

Here's the memo, from the Mortgage Guaranty Insurance Company, with parenthetical annotations from the realtor:

February 6, 2008

Dear Valued Customer:

As a result of our ongoing evaluation of market conditions and loan performance, we are making a number of changes to our base underwriting guidelines and have created a new set of guidelines for areas exhibiting market weaknesses. The following underwriting guideline changes are effective for mortgage insurance applications received by MGIC on or after March 3, 2008.

(Then it goes on to break down underwriting guidelines. FICO is very important...and it better be above 660! And if the appraiser says that the property is in a declining market [see list below] , then many lenders wouldn't touch it, as these loans right now can't sell on the secondary market.)

Here is the list of restricted markets:

• Arizona -- Entire State
• California -- Entire State
• Florida -- Entire State
• Nevada -- Entire State
• Denver-Aurora, CO
• Greeley, CO
• Washington-Arlington-Alexandria, DC-VA-MD-WV
• Atlanta-Sandy Springs-Marietta. GA
• Honolulu, HI
• Coeur d'Alene, ID
• Chicago-Naperville-Joliet, IL
• Baltimore-Towson, MD
• Bethesda-Frederick-Gaithersburg, MD
• Hagerstown-Martinsburg, MD-WV
• Barnstable Town, MA
• Boston-Quincy, MA
• Worcester, MA
• Detroit-Livonia-Dearborn, MI
• Minneapolis-St. Paul-Bloomington, MN-WI
• Atlantic City-Hammonton, NJ
• Edison-New Brunswick, NJ
• Newark-Union, NJ
• Ocean City, NJ
• Nassau-Suffolk, NY
• New York-White Plains-Wayne, NY-NJ
• Poughkeepsie-Newburgh-Middletown, NY
• Portland-Vancouver-Beaverton, OR-WA
• Virginia Beach-Norfolk-Newport News, VA-NC
• Winchester, VA
• Tacoma, WA

(One last note, many of these neighborhoods that are essentially being redlined are what I would describe as "on the cusp," in that they were formerly undesirable areas to live in because of crime or substandard housing. That will make it doubly hard to reverse these trends. Just an observation, but these were areas of wealth creation that could sink right back to being not so hot again.)

At the time of publication, Cramer had no positions in the stocks mentioned.

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