Even though the market is once again enjoying a delusion sandwich covered in toxic mortgage mustard, the reality on the ground continues to become grimmer. Wachovia, one of the nation’s largest banks announced an $8.9 billion quarterly loss and that they’ll be slashing over 6,000 from their workforce. Oh, and the dividend is getting slashed as well. So what happens? The market of course pushes the stock up by 27%! American Express, the uber credit card company also announced problems but the market is believing that the Federal Reserve and the U.S. Treasury have some mythical powers to create money out of thin air. They do only if you own an investment bank.

Yet back in the trenches of reality, Americans are feeling the massive pinch of the world’s biggest housing bubble being pricked by the sharpest needle of all, imploding debt. That is no hyperbole. In no time in our civilized history have we seen such speculation on a global scale stemming from real estate. California is the poster boy of this housing bubble. You would think that the market would be punishing lenders even harder who have created and own such financially destructive loans yet many see this as a time to jump in. Just look at the markets. Tread these waters at your own peril.

Today, the California foreclosure numbers for the second quarter were released and they are not a pretty site. First, let us take a look at the first sign of future wealth destruction, the notice of default:

As you can see from the chart, notice of defaults have gone sky high in that past few quarters. We went from a relatively mild 2006, to a quickly deteriorating 2007, to the current record breaking problems in 2008. The reason notice of defaults are so important for future predictions is that these are homes that have yet to be taken back by lenders. These are early signs of trouble. What this means is lenders in the upcoming months better gear up for a tsunami of REOs.

We already know that the short-sale option has been a marginal joke in California. Many are so deeply in negative territory that no lender would go for a short-sale and rather would take a foreclosure. They have too many problems trying to stay solvent and avoiding their own foreclosure ala IndyMac Bank. The vast divide between lenders and how loan modifications are being handled is an utter joke. There is no standard. Some lenders are willing to work with you while others are doing absolutely nothing in the area of loan modifications. They are all holding their breath and preparing their turd bucket of mortgages ready for release into the belly of Fannie Mae and Freddie Mac. Bank of America who recently acquired toxic mortgage producer Countrywide recently alluded to the fact that they may not be backing up Countrywide debt:

“(Global Trend Analysis) Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.’s debt after taking over the mortgage lender, increasing the likelihood of a default.

“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors had grown more optimistic the bank would back Countrywide debt. Ratings firm Standard & Poor’s cut the mortgage-lender’s debt to junk today after saying it would raise the grade earlier this week.”

They basically are doing a “it wasn’t me” on the market. After all, would you back up Countrywide’s toxic debt?

Last quarter, there was an all time record of 121,341 notice of defaults filed in California. This is incredible. Only 3 years ago, the number was 12,408 for the second quarter of 2005. That is a ten-fold jump in 3 years! Yet the more distressing analysis is when we look at the notice of defaults and also combine the actual foreclosures that occurred in the second quarter:

We are now in uncharted waters. The notice of default numbers may look like they are plateauing but this is like arguing whether you are going to jump out of a 100 story or 102 story building. The number of foreclosures in the second quarter hit a stunning 63,031. If you look closely at the chart, even in 2006 many of the notice of defaults where resolved without a foreclosure actually taking place. Well of course this occurred because the massive speculation allowed those who over paid to sell to someone who over paid even more.

“(DQNews) Of the homeowners in default, an estimated 22 percent emerge from the foreclosure process by bringing their payments current, refinancing, or selling the home and paying off what they owe. A year ago it was about 52 percent. The increased portion of homes lost to foreclosure reflects the slow real estate market, as well as the number of homes bought during the height of the market with multiple-loan financing, which makes ‘work- outs’ difficult.”

This is not good and only reinforces the obvious which the overall market is ignoring at the moment. What this tells us is 78 percent of these notice of defaults will end up in foreclosure. Now the precipitous decline in prices is ensuring that many of those 121,341 notice of defaults will further add REO inventory for the remainder of the year and cause future losses to these banks and lenders. Now how is this going to be healthy for the market? If anything, it assures us that prices will be falling for the remainder of the year and will put a vast amount of inventory on the market during the worst selling times which are the fall and winter. This combined with the $300 billion in option ARM loans will be a destructive combination. We have yet to see the massive recasts in the pay Option ARM market. You can do the math and any lenders with large exposure in California are going to get hammered.

Paulson saying we are months away from a bottom is absurd. Senator Jim Bunning was right when he called him out and stated that Paulson will be out in a few months, but the rest of us will be here to deal with any of the consequences of hasty actions. The bottom is in…but for Paulson’s career.

We have just cut the umbilical cord of reality from Wall Street. Look at the action with WaMu announcing a $3.3 billion loss:

“SEATTLE—Washington Mutual says it swung to a loss in the second quarter as it increased to more than $8 billion its reserve to cover sour loans.For the April-to-June period, the Seattle-based bank says it lost $3.33 billion, or $6.58 per share, which compares with a profit of $830 million, or 92 cents per share in the year-ago period. Results include a previously disclosed, one-time reduction of $3.24 per share related to the company’s capital raising in April.

Thomson Financial says analysts, on average, were expecting a loss of $1.05 per share.

The bank says it increased its loan loss reserves by $3.74 billion to $8.46 billion during the quarter, as it continues to face mounting losses stemming from bad mortgages.”

Shares of WaMu went up and down in after hours trading as if there really is any doubt about the data. Not only did WaMu miss their target, they missed it by multiple times! Bwahahaha! And the freaking stock barely moves. Do you know where most of WaMu’s loans are? In California. Just let the above charts sink in with their vivid colors and try to take a guess what is going to happen. They’re going to need all those loss reserves for the army of Real Homes of Genius they have in their portfolio. Companies should just announce a $1 trillion dollar loss and you’ll see their stock rally by 50%. Apparently bad news is now good. Hello George Orwell!

What we are seeing on main street is not being reflected by what is occurring in the stock market, which should at least reflect what is going on in the real world (aka, look at the above charts). Yet what do we expect from a government that tells us we are not in a recession, unemployment is not bad, and inflation is contained? Their panacea of course is drilling for oil we won’t see for at least 5 years! I didn’t realize subprime mortgages ran on 89-octane. All you need to do to verify this reality is take a trip to your local grocery store, fill up your tank of gas, send your kid to college, look at your mortgage, and try booking a trip out of the country and you’ll quickly realize that something is rotten in Denmark.

Let us take a look at another data point that shows us how far we are from a bottom here in California:

The above is a look at subprime loans in the state. As you can see, there are still plenty out there to cause damage but take a look at the Alt-A products which most pay Option ARMs fall under:

And this should make you feel warm and fuzzy all around. The Congressional Budget Office came out saying that the rescue of Fannie Mae and Freddie Mac would cost approximately $25 billion but no one really knows how much. Heck, WaMu and Wachovia combined dished out losses of $12.2 billion in one quarter and they are peanuts to the issues confronting Fannie and Freddie. Yet they are also seeking in the legislation to increase the public debt limit by a stunning $800 billion from $9.8 trillion to $10.6 trillion:

“(WSJ) The $25 billion cost estimate from the CBO for the rescue plan was downplayed by Democratic and Republican lawmakers. “Everyone knows it’s just a wild guess,” said Sen. Jim DeMint, (R., S.C.). He called the plan a “huge gamble,” but added that, “it’s kind of: Guarantee a little now or pay a whole lot later.”

Lawmakers plan to raise the public-debt limit as part of the legislation to $10.6 trillion from $9.8 trillion. Congress must vote to increase the limit to account for additional borrowing, something it is loath to do, although it would have had to take that step this year even without the rescue plan for Fannie and Freddie, Democratic aides said.”

This is flat out absurd! What a disgrace. You need to get in contact with your Congressperson or Senator and say you will not stand for this absurdity:

Find your respresentative

Find your Senator

Give Senator Jim Bunning some support to filibuster this piece of toxic legislation

Can you see what is happening? You’ll also see in the legislation that they are trying to raise caps to $625,000 which of course will make it convenient to off load this crappy Alt-A California mortgage junk onto the public debt. If you needed any more evidence that Washington is trying to offload this entire mess on the U.S. taxpayer, you need not look any further than this piece of legislation. What a shame.

There are more Alt-A loans in California and these actually have a higher concentration of no-doc loans! Can you take a wild guess how these are going to do now that the state has a median price of $328,000, down 31.5% from the peak price of $479,000? If you look to Washington or Wall Street for your answer, don’t expect one that reflects the reality on the ground. We are living in two separate universes here. If you would have bought a median priced home in California last year at the peak, you would now be down $151,000. Is this really a reason for a rally especially in lenders that fed into that speculation that is now clearly bursting with an onslaught of foreclosures?

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