Banks Can't Shoulder Home Equity Burden

Purchased HELOC.

Get that term into your head. Home equity loans that were purchased from other originators are the scourge of the system. Any piece of paper backed by these second liens that were issued by pure mortgage originators is just a goner.

This is the paper that was generated by Fremont General(FMT Quote - Cramer on FMT - Stock Picks) and NovaStar(NFI Quote - Cramer on NFI - Stock Picks) and New Century Financial and American Home Mortgage and so many of the other bankrupt and walking-dead companies. It was mostly no-documentation loans paper and served as another way to tap money that was meant to be paid back when you flipped a home. It was predicated on the continued increase in value of your home.

And now it is being defaulted on massively. It simply doesn't pay to pay it, even if you lose your house eventually. The moment that house drops 10% in value -- and that has been happening all around the country but particularly in Florida -- you get only the most braindead people paying it back. (I said this in front of a Washington Mutual(WM Quote - Cramer on WM - Stock Picks) executive this September and he was livid, but look where that stock was vs. where it is now.)

Purchased HELOC, home equity loans bought, is the most dangerous kind of business, one that Wells Fargo(WFC Quote - Cramer on WFC - Stock Picks), which prides itself on rigorous lending, should never have participated in,. This is also the paper that E*Trade(ETFC Quote - Cramer on ETFC - Stock Picks) has in abundance. In fact purchased HELOC is what I think will make it so E*Trade has an awfully hard time surviving. It appears that CIT(CIT Quote - Cramer on CIT - Stock Picks) has a lot of home equity loans on the balance sheet, too, if you want to look at another potential disaster. Of course Washington Mutual and Countrywide(CFC Quote - Cramer on CFC - Stock Picks) didn't need to purchase. They have it in spades. Citigroup(C Quote - Cramer on C - Stock Picks) has it because American Home originated a lot for them. Bank of America(BAC Quote - Cramer on BAC - Stock Picks) has tons of home equity loans too.

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