Cramer on BloggingStocks: No rate cut? No relief

Posted Oct 30th 2007 8:07AM by Jim Cramer
Filed under: Market Matters, Federal Natl Mtge (FNM), Countrywide Financial (CFC), Wachovia Corp (WB), Washington Mutual (WM), Housing, Federal Reserve, Cramer on BloggingStocks

TheStreet.com's Jim Cramer says the price of no more rate cuts from the Fed would be foreclosures. Lots of them.

Have you noticed that MBIA (NYSE: MBI) (Cramer's Take) and Ambac Financial (NYSE: ABK) (Cramer's Take) are just being crushed today?

More important, has the Fed noticed?

Lots of people have asked me where I came up with the $500 billion loss number I've been mentioning. Here's the deal: A large group of people, 50% of the 14 million homebuyers, are going to default on their "2 and 28" adjusted-rate mortgages now that they are being reset. Many of these people paid for the 2% with home equity loans that they can't pay back.

Think of those millions of no-money-down ads. Those worked! These people can't pay now that the resets are in the house. Others, allegedly AAA borrowers, will find themselves defaulting, and the insurance won't be paid. That's horrible, but that's what the stocks are saying.

I am just hoping that things stop at $500 billion. The only hope is 2%-3% refinancing, which can be had if the Fed cuts rates to 3%. Otherwise we have $500 billion in losses.

Now, understand, that will not be catastrophic. Washington Mutual (NYSE: WM) (Cramer's Take) doesn't make it, Ambac Financial, PMI Group (NYSE: PMI) (Cramer's Take), MGIC Investment (NYSE: MTG) (Cramer's Take) and MBIA don't make it, and Fannie Mae (NYSE: FNM) (Cramer's Take) gets killed. Countrywide (NYSE: CFC) (Cramer's Take) goes belly-up. Maybe Wachovia (NYSE: WB) (Cramer's Take) gets really hurt and Merrill still more.

That's it.

Except for one element: foreclosures. That's the cost of no rate cuts.

Foreclosures.

If the country can handle 7 million homeowners losing their homes, then this situation is going to be shrugged off, the balance sheets cleaned up, and we are off to the races again.

I believe the Fed kind of gets this Armageddon for homeowners of the 2005-07 vintage. Remember, despite misstatements to the contrary, my "rant" in August on CNBC was about the 7 million homeowners who are soon to be renters.

I believe that's what's going to happen, regardless of the Fed. But aggressive cutting could spare those who are reset from the beginning of 2007.

Why aren't I more concerned? Because of the monster rally we had after the country wiped out the S&L industry.

It will happen again because of a Fed ease. But not fast enough for the poor people who took no money down and the people in areas like the Inland Empire in California, where I think there will be a total wipeout.

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Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO.

Tags: abk, ambac financial, AmbacFinancial, cfc, countrywide, fannie mae, FannieMae, featured, fnm, jim cramer, JimCramer, mbi, mbia, mgic investment, MgicInvestment, mtg, pmi, pmi group, PmiGroup, wachovia, washington mututal, WashingtonMututal, wb, wm

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Reader Comments (Page 2 of 2)

11-05-2007 @ 1:03PM

Joe George said...

The margin rates on commodities have not been increase for a number of years. The margin requirements on a crude oil contract is the same today with the price at 70.00 a barrell as it was when the price of oil was 10.00 a barrell. There sure is a lot of leverege out there today.

10-31-2007 @ 4:57PM

Spoonercat7 said...

This is just nuts, these pin heads go out and buy a house way beyond there financial ability knowing at some point the rates will be raised and they will be in trouble. Now the MORONS we have running this country are going to use my tax dollars to bail their sorry asses out of this mess. Further our dollar is in the tank and will not be out for years to come and what do we do, cut the interest rates. It is a false economy folks, at some point it is going to crash and it will be major. I suggest those not thinking of getting liquid better be ready to bend over and kiss their butts goodbye because it will be catastrophic when it crashes.