TheStreet.com's Jim Cramer says the mortgage problem is in the process of cresting, which is why the stocks have largely bottomed.

We are in the heart of default country, and we knew we would be. This is the toughest moment. You need to go back and look at the calendar to realize the astonishing acceleration in defaults. It's simple: This moment two years ago is when the underwriting standards were the lowest, and this is the moment when the defaults will be the highest because the loans are resetting at high levels and most of the lenders, lenders like Countrywide (NYSE: CFC) (Cramer's Take), are more interested in getting as much out of a borrower as possible before kicking him out than working out the loan.

Think about it.

In the second quarter of 2006, the housing industry was going strong. We were in the 7-million-homes-changing-hands mode, and the vast majority of those homes required little money down, with home equity loans being taken out immediately to pay whatever little interest was being charged. These were the moments of the ultimate no-doc-high-fee loans by New Century Financial, Ameriquest, Resmed (Ditech), American Home Mortgage, Novastar, and of course, Countrywide. This was when the homebuilders' mortgage arms lent the most terribly.

Home builders are in trouble. Wall Street just has to look at stock prices for Hovnanian (NYSE: HOV) and Beazer (NYSE: BZH) to see that they and their peers have lost half of their value in a year.

But, builder KB Home (NYSE: KBH) has a bit of a secret weapon. Its homes, designed in part by Martha Stewart, are still selling relatively well. The Stewart homes are only 5% of KB's sales, but as The Wall Street Journal points out [subscription required]: "From March through June 15, the two Martha Stewart developments alone drew 42% of the people who visited KB's 22 subdivisions in the Atlanta metro area."

Some buyers, it seems, want the homes because they believe that Stewart signifies "class". Others think the homes will have better resale values.

The venture may offer a bright spot of the entire industry. Nothing will get home sales back on track except a major upturn in the market. But, the idea of home builders selling new inventory in celebrity partnerships may have a future.

The Elvis Presley model may be on the market sooner than people think.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Another homebuilder is feeling the pain today as KB Home (NYSE: KBH) becomes the latest homebuilder to disappoint this morning. The stock has managed to bounce back to around break even 30 minutes into the trading session after starting sharply in the red. At one point, shares traded down as low as $39.75 but have bounced back to $40.42 down $0.01.

The company announced this morning that in its second quarter it lost $174.2 million, or $2.26 a share. Wall Street had been expecting the company to show a 7 cent per share profit, and analysts polled by Thomson Financial had estimates ranging from a loss of $1.46 a share to a $0.46 per share profit.

The company blamed its poor quarter on three ongoing market conditions:

1. Current oversupply of new and resale housing inventory
2. A difficult situation compounded by aggressive competition
3. Continued weak demand

Bill Miller, the famed Legg Mason fund manager, was on television last week. He said he is long on housing stocks.

In Barron's Up and Down Wall Street column (subscription required), Doug Kass of Seabreeze Partners said he was short housing stocks - no big surprise there. Kass referred to order cancellation as the reasoning for his bearishness.

Typically, publicly traded homebuilders have cancellation rates of 15% of orders. However, that number has jumped considerably. Cancellation rates of publicly traded homebuilders:

• Centex (NYSE: CTX) - 37%
• DR Horton (NYSE: DHI) - 40%
• KB Homes (NYSE: KBH) - 53%
• Lennar (NYSE: LEN) - 31%
• Pulte Homes (NYSE: PHM) - 36%
• Beazer (NYSE: BZH) - 57%
• Hovnanian (NYSE: HOV) - 35%
• MDC Holdings (NYSE: MDC) - 49%
• Standard Pacific (NYSE: SPF) - 50%

These numbers (from the Barron's article) are so bad that the worst might be unfolding right now.

TheFly's advice, Miller tends to be too early and Kass is often too negative when the worst is already priced in the stocks. I'd say, start following these stocks again, expecting a bottom in the spring and early summer.

The most recent rally is mostly from an oversold condition. I'd wait for another correction and see where the industry fundamentals stand.

Options backdating scandals have felled many a tech CEO, and KB Home (NYSE:KBH) had the unlikely distinction of being an unlikely choice for an options backdating scandal. The company's CEO, Bruce Karatz, resigned today over stock options misdeeds. Jim Cramer (among others) didn't mourn him much, however, and said it's actually a good thing. Cramer says you have to go buy shares of KBH, because as the options scandal pressures a stock down, then it inches up, and then on the resolution of the scandal you must buy. With the CEO resigning, that is now out of the way.

Cramer said that even if you back-date options you have to think you are looking out favorably on the company down the road anyway. If a CEO was willing to take stock over cash then you should be inclined to take his lead. He thinks at 1.25 times book value that is a very cheap price. It has almost no debt. It could be a takeover target because it is so cheap. Cramer thinks private equity buyers could do it, or even a Lennar Corporation (NYSE:LEN).

KBH is widely and wrongly perceived as a California and Las Vegas homebuilder, but that isn't the whole truth, says Cramer. California is now 31% of sales and the company builds homes in 13 states. When California comes back, so will KBH. It also builds award-winning neighborhoods. He said he didn't like it when the shares were super-high, but now closer to lows he likes it.

There is no housing bubble. That is a stupid term promoted by journalists and analysts fighting the last war like an old general. The stock market "bubble" burst sending the NASDAQ plummeting from 5000 to 1200. Anybody foresee housing for sale at an 80% discount let me know and I might be able to help you with that problem. It's not going to happen!

If and when certain markets collapse 20% to 30%, it should not be deemed a bubble. It will happen in some markets and has happened in over-built condo markets. But these units will be absorbed in the next few years. The greatest pain will be felt by the biggest speculators and the most overzealous people participating in unorthodox loan programs.

How many stocks move up and down that much in a year? Plenty! Think Google, or Merck, or Black and Decker. Even I, who have been trying to add some sanity to GOOG's valuation through numerous posts, never said GOOG was a bubble stock.

There is a need for more housing, period! As a current investor in four different housing projects -- three in Southern California and one in Phoenix --I can testify that all will sell at considerable profits. We have seen no let-up in demand. Each one is different: One is an infill project of 150 single family homes. Another is a new development of 200 homes in a growing community, a third is a mixed use project of 60 condominiums over retail stores and the fourth is a unique town home project surrounding a parking structure that is commercial adjacent.

The only problem we see is getting entitlements and building permits. This process has become excruciatingly painful in many parts of the country and just about everywhere in California. My home town of Santa Monica being one of the worst offenders, used to be referred to as "The People's Republic of Santa Monica." That was too long a nickname so some just started calling it "Soviet Monica." I love this community but there are times I think we are all over-indulgent meddlers.

Hilary: great smile, great dimples, and best of all, GREAT calls... (Sorry, I just can't be PC -- not in a blog.)

Hilary Kramer (HK) in her stock blog, HilaryOnStocks, has changed direction and decided to make people money by saving them some money, suggesting it may be time to bail out of certain holdings. Generally speaking, her comments on the 10 stocks she reviewed were very good.

However, I must take exception to the overall principle of trading in and out of stocks because that may not be smart for certain investors. For example, she suggests that Apple may be over, with its long run-up behind it and that taking some profits is in order. I made a similar argument last week.

More in depth review might reveal that if you got in early and live in a high tax state like California you are looking at losing 22% to 24% of your gain to taxes when you add the state tax to the federal capital gains tax and then add up the transaction fees. So while HK is correct that Apple may start moving lower, the question is by how much?

Also, you must consider where you will put the money when you get it. And if you put it in cash or short-term investments, then when will you get back into the market and what will you buy? And you will be putting back 25% less perhaps.

I am not against paying taxes or rotating out of questionable companies, but you must always look at the broad picture as it applies to your own situation.

Here's my take on the 10 stocks she suggests selling:

Home Depot (HD) and KB Homes (KBH): Solid companies and while they my lag for a while, if you got in at the right price they can be good core holdings depending on your personal circumstances.

Carnival Cruise Lines (CCL), Coach (COH), Gap (GPS), General Motors (GM): You don't need to bother with them now.

Apple (AAPL) and Hewlett Packard (HPQ): Big maybes.

Krispy Kreme (KKD) and Jet Blue (JBLU): No reason to own in any market!

Also check out my recent posts: "Dividends are very sexy -- no joke" and "A bad rap for a bad market"