This column was originally published on RealMoney on Aug. 13 at 12:26 p.m. EDT. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.
This is Part 4 of Jim Cramer's series of posts on Ben Bernanke's plan for the Federal Reserve during the current credit crunch. Read Part 1, Part 2, Part 3 and Part 5.
So not one but two train wrecks have converged at the same time:
- The homeowners who bought in 2005 and 2006 have begun to default, with the weakest borrowers now defaulting at a 20% pace (that's Countrywide's(CFC Quote - Cramer on CFC - Stock Picks) number, and it is a good lender -- and it represents 20% of the origination market).
- The banks have cut off lending to these mortgage brokers. That's what Countrywide's filing made clear this week.
- The investment banks have pretty much ceased packaging mortgages as the mortgage business has dried up.
- The mortgage-backs that they sold before are for sale all over the place, particularly by the hedge funds with the jittery client base.
- And there are no buyers.
Now everything's frozen. Many of the 14 million homeowners who bought in 2005 to 2007 are underwater on their homes. That doesn't matter to anyone who can pay the new rates as they reset. It doesn't matter to those who don't need to move and are solvent.
But it does matter to anyone who had bad credit or took the home-equity loans out and can't pay.
We don't know how many people are in that situation. Maybe it is only a million households. However, given the propensity of the people during those two years to take teaser rates, it might be as many as
half of the people who bought.
Many of these loans reset each month, and a higher percentage of holders than ever before has been defaulting. The people who default are basically squatting in their homes or walking away from their homes and renting.
The banks that kept the loans or the institutions that bought the securities made up by the loans are frantic. There's no market for these loans, and the banks that still own the mortgages are under-reserved. That's why you see big hits to their earnings.
The investment banks have lost that stream of packaging income. The clients who bought the mortgages are also the clients who tend to buy private-equity high-yield bonds, doing the same "short Treasury, long high-yield" that they did with mortgages. So the investment banks are "hung" on those loans.
The hedge funds and banks are being hit with massive redemptions.
Which brings us back to Ben Bernanke and the
Fed, as I discussed in
Part 1.
I know from my contacts that the Fed sees all of this. It isn't brainless. The Fed wants the whole chain of cheap credit to dry up. It wants homes to become affordable, and they are becoming more so by the day, and it wants every speculator in the process to go out of business.
Jim Cramer
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