Fortune has an interesting chart that shows the percent of sub-prime mortgages on a state-by-state basis. What’s interesting about this is that the Northeast and California lead the pack, with large areas having more than 45% of their mortgages classified as sub-prime. These are also the states with the most expensive homes and where real-estate has remained somewhat stable.

Sure prices have dropped in California and Massachusetts but they haven’t cratered. The July report from the National Association of Realtors actually found that:

“Existing-home sales in the Northeast increased 1.0 percent to a level of 1.02 million in July, but are 2.9 percent lower than July 2006. The median existing-home price in the Northeast was $290,900, up 5.9 percent from a year ago.”

In California the picture was much the same:

“Regionally, existing-home sales in the West rose 1.8 percent in July to an annual pace of 1.12 million, but are 15.2 percent below a year ago. The median price in the West was $349,400, up 0.9 percent from July 2006.”

So, the areas of the country with the largest number of sub-prime loans have actually seen price and sale increases over the last year. Once again, I have to wonder if this situation is being accurately reported.

Some homeowners will default but the picture is not nearly as grim as you are reading. In fact, I pose a challenge, please post below in the comments box (anonymously if you like) if you are someone you know is close to defaulting on their mortgage. Let’s hear from the street what’s really happening.

Maria Bartiromo flew out to LA to speak with Angelo Mozilo and CNBC ran a live interview at 11 AM this morning.

Mozilo essentially said that Countrywide is fine, that the company does not face a bankruptcy risk any greater than six months ago, and that the Merrill analyst was "irresponsible" to mention the possibility of bankruptcy. I actually concur with the last point, especially since the analyst mentioned bankruptcy 2 days after saying that the company had no such risk. I am not so sure about Mozilo's other claims and believe that he recognizes that the situation is an especially severe one. He acknowledged that the Bank of America deal announced last night is not a good one for Countrywide - he sold an 'in the money" option on 17% of his company that yields 7.25% for the purchaser until exercised for only $2 billion. That, in fact, smells to me of desperation as Countrywide couldn't get better terms from any other money center bank (Mozilo said that all the other banks told him that they couldn't consider a deal because they have their own mortgage exposure problems).

It is what Mozilo said next that really smelled of hypocracy. Mozilo said he sees a housing-induced recession in the offing over the next year. Somehow, while Countrywide is the largest mortgage lender and is going to be fine, we are going to have a housing-induced recession!

I don't profess to have a clue at this point which way the economy is going tomorrow or the day after tomorrow much less in three or six months. This volatility has made economic judgments very, very certain. The economy may shake this off and return to expansion in September, leading the stock market much higher. However, this economy was strong until four weeks ago, and if housing is going to cause it to unwind and in fact fall into a recession, then this housing / mortgage situation is still in the second inning and the $2 billion that Angelo just got from B of A isn't going to save his business.

There's not a lot of new on this yet but it looks like Capital One is shutting down its mortgage unit. Capital One expects that the total after-tax charge associated with this closure will be approximately $860 million, or $2.15 per share.

"The reductions in demand and pricing in the secondary mortgage markets make it difficult to operate our wholesale mortgage banking business profitably," said Gary Perlin, Capital One's Chief Financial Officer. "Beyond that, Capital One's other businesses are supported by ample liquidity and funding including deep access to deposits, a "stockpile" of subordinated credit card funding in place that allows approximately $9 billion of AAA credit card funding going forward, and a $25 billion portfolio of highly liquid securities."

What's interesting is that the release sounded very pessimistic on the longer-term mortgage trends. As it states:

" Further, recent and continuing developments in the mortgage markets reduce the long- term outlook for profitability in the business, as the company expects markets for prime, non-conforming mortgage products are likely to remain challenged for the foreseeable future. "

1,900 positions will be eliminated as a result of this decision, the majority by year-end.

On the markets, Capital One shares dropped 5% to $63.38.

Why the Jumbo Loan Mortgage Has Gone Dry

It's going to become harder and harder to get a jumbo mortgage, a home loan over $417,000. That's because banks who lend mortgages like to resell them almost immediately and pocket the cash. In doing so, they get upfront money and get the risk off their books.

The problem is that while quasi-government agencies Fannie Mae and Freddi Mac only buy loans from banks under $417,000. Other investors buy jumbo loans and at the moment they are not buying. So, if banks don't have a place to sell their jumbo loans (securitize) then they aren't going to make loans. Or if they make loans, the interest rate will be significantly higher.

The 30 Year fixed Jumbo mortgage is now at 7.09% versus 6.25% for a non-jumbo conforming loan. That assumes you can even get a jumbo mortgage. Even borrowers with good credit are finding it difficult to be approved.

This certainly portends at least a short term drop in home sales as buyers struggle to get the financing they need in high priced markets like California and New England.

The Wall Street Journal printed an excellent article today which really gets at the heart of the entire credit-crunch sweeping the planet. It's the story of Mario and Leticia Monte who were seduced into buying a home they probably couldn't afford or shouldn't have been able to afford. In their case, they used a sub-prime 2/28 mortgage with no money down. A 2/28 keeps a low fixed-rate for the first two years and then rests for the remaining 28 years at a rate that is above an interest-rate index. The Montes are moving into their third year and expect the reset to cost them an extra $900 per month, pushing their family budget well into the red. Based on local prices their home has mostly likely lost value and they have no equity in it, preventing them from refinancing or even selling.

They have three options:

• Try to get the bank to change their terms, which they don't seem willing to do without equity in the house.
• Sell their house, which seems unlikely since prices have dropped and they won't be able to repay their mortgage.
• Give the bank the keys and walk away.
• Cut, and cut expenses, take on extra jobs, and keep the house.

The article ends with Mrs. Montes saying: "We're going to keep it. Hopefully, we won't go down and if we do, we're going to go down with a fight."

How this plays out for Mrs. Montes and the millions of others across the country will determine the future of the economy over the next couple of years.

The National Association of Realtors reported today that home prices dropped by 1.5% from a year ago although sales dropped by 10.8% compared to the second quarter of last year. In addition, the report showed that many markets saw price appreciations instead of drops. Salt Lake City saw a price appreciation of 21.9%.

To me, the data seems to show a spotty housing market with some overbuilt areas feeling the pain while other areas seem to be doing fine. In general, I feel that as long as the job market stays robust then the housing market will avoid a major collapse. Housing is one of the last things someone wants to lose. Although the increases in ARMs will cause some pain an overall healthy economy should keep the market fairly stable.

If the economy slips into recession or the unemployment rate increases though, all bets are off.