Still More Losses on Home-Equity Loans? You Don't Say!

Let me say at the outset that I am not accusing anyone of lying. But it is disheartening to see Bank of America (BAC - commentary - Cramer's Take) widen the loss guidance on home-equity loans.

Look, here is the truth about home-equity loans, and everyone in the business knows it, but nobody talks about it.

A gigantic amount of people took out home-equity loans after putting little money down for their houses. They stop paying back the home-equity loans and they gamble they will not be foreclosed. They are mostly right. The complications with how these loans were made and who owns them and the smaller size of them make them really hard to focus on. The people who took them are now using their credit cards and will most likely default on them, too, which is why Capital One (COF - commentary - Cramer's Take) should be sold up here.

What bothers me is that the banks did no due diligence and don't seem to know the collateral. If you bought a home with little or no money down and you attached a home-equity loan to it, the loan's going to fail. You know it, I know it, Bank of America knows it. But they persist with the fiction that there won't be that huge a number of defaults.

Now there is a bit of a Sarbanes-Oxley problem. The banks are not supposed to project losses or gains off their current book. The Sarbanes-Oxley rules pretty much insist that you can't take the writedowns ahead of time.

But you can still project the darned things. You gave a mortgage to people in 2005-2006. They took a home-equity loan out right after. They are going to skip.

That's what you need to know.

That's what the banks know.

Why don't they just tell us the numbers for heaven's sake? Are they worried they are scaring investors?

Oh, please.

The truth has no deadline. The banks could come out and say, "OK, here are the numbers, here's what's happening."

They don't do it, and we get this ridiculous pattern of short-squeeze-and-sell that has marred the stocks for months and will continue to do so. This is still a group to avoid.

Random musings: Looks like no one waited for the natural gas numbers. Oh well, still the year of natural gas and the most compelling stories out there.

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

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