'Walkaways' Could Add to Housing Inventory

The housing crisis should be more front and center now that the clarity of how bad the loans are from 2007 hits the market.

One of the things that has kept hope alive during the last year was that standards had tightened in 2007, as it became obvious that housing was in a long-term downtrend.

We now realize that because of the big-step function down in housing in December and January that the standards weren't high enough. 2007 is turning into a much worse vintage than we thought.

Perhaps that's why there is a new sense of urgency at the federal level.

Now, it is getting exceedingly clear that some of the biggest mortgage companies that lent recklessly are really under a lot of pressure, especially GMAC. Of course, Cerebrus is making clear that it is more solvent than the U.S. government, and the fact that people believe them is quaint. I don't share that complacency. I am worried enough as it is about the possibility of a federal bailout for Fannie Mae (FNM - commentary - Cramer's Take). If that's the case, I think it is reasonable to fret about Cerebrus.

I also think that if something isn't done soon, we will begin to see a huge number of homes flow back into the mix as 2007 loans become walkaways.

The crisis is being exacerbated by the remedies to date and by the foolish and chimerical process of splitting the muni biz from the structured biz at the monolines. The structured biz is a black hole that will rot the system more than the muni biz losing its insurance.

But then again, all of this is for naught. The Fed doesn't seem to understand how the monolines work.

They will soon enough though.

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