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.

This was also the height of packaging, where the loans were shipped off quickly to who knows where. These were the homes that were being priced at 120% of value when you tacked on home equity loans, which a huge number of borrowers did.

In short, from now until the end of the year, almost everyone who bought in 2006 is underwater, and it is only the need to preserve credit and the American dream that is keeping people in these homes.

That's why I have been saying 17 months from now -- it was 18, we get closer! -- we will be through this problem. I am picking 17 months because these bad loans reached their height during this period and went on until the end of the year, and I figure those who are going to default will do so within this period.

After 2006, the underwriting standards tightened dramatically, although there were still some homes underwritten by that nasty gang of ne'er-do-wells, but that lasted about two months. That's another reason why the problem will go on through 2009 -- those deals need two years, too.

After that, here is what will happen. The remaining people will find a way to make ends meet and the homebuilders, the Tolls (NYSE: TOL) (Cramer's Take) and Lennars (NYSE: LEN) (Cramer's Take) and Hovnanians (NYSE: HOV) (Cramer's Take) and KB Homes (NYSE: KBH) (Cramer's Take), the Pultes (NYSE: PHM) (Cramer's Take) and DR Hortons (NYSE: DHI) (Cramer's Take), will have gone through their whole spec inventories and the new-home inventories will be smaller. The household formation numbers and the lower price of homes will force more buys to be made.

And we will be out of this jam. The important thing to remember is that there should be no surprises that this is occurring right now. That's the 2-and-20-plus HELOC talking, and anyone who didn't think it would happen this way is all wrong.

It is why I was ranting for the Fed to cut rates hard back then, so the two and 28 when they rolled over would not be the disaster that they turned out to be. You couldn't refinance at those higher short-term rates. It is why the FHA was a must to get involved, because otherwise it was all voluntary, and despite what you hear, the mortgage servicers would do better if they harass and harass and harass rather than work with the borrowers. The mortgage companies need to get something out of them. It is why the CDOs were doomed from the period. It is why outfits like Ambac (NYSE: ABK) (Cramer's Take) and MBIA (NYSE: MBI) (Cramer's Take) were walking dead men as they insured those CDOs and why PMI (NYSE: PMI) (Cramer's Take) and MGIC (NYSE: MTG) (Cramer's Take) will struggle to stay alive -- these companies insured the individual loans. It is why the regional bank holders of HELOC will most likely not make it.

It is why everything bad is happening now.

What people don't realize is that things are going to crest in five months, the peak of two years of madness, and we have to be thinking that things are going to get better, not worse. It is why the homebuilders stopped going down. They are discounting the scenario I just outlined.

If we get congressional relief and help from the FHA, then 17 months will be too long and the turn should be within a year, because the foreclosures would die down dramatically.

Already the mortgage servicer reports, just released for April, are showing some improvement. That's people digging in their heels from 2005 and the first part of 2006. It is why, as some would say, the pig is moving through the python.

Cause for optimism? No. Cause for realism and why the stocks have not taken out their lows.

Next week Toll and Hovnanian report. They will not be able to say we are over the hump yet.

But if they don't acknowledge the hope, they will be just as wrong as they were in the height of 2006, when they were all playing the game.


RELATED LINKS:

• Don't Buy This Housing Report
• Consumers Lower Expectations on HELOCs

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. At the time of publication, Cramer had no positions in the stocks mentioned.