Some housing reports from Wall Street and Washington. Paul Muolo, "Some industry executives are telling us there's a growing wave of refinancings sweeping certain segments of the business. Which segment? Servicers of payment-option ARMs, watch out. Apparently, all the negative publicity surrounding POAs is starting to hit home with consumers and they're opting to get out of their ARMs. A recent report by Sandler O'Neill notes, 'We recently heard from one mortgage REIT that ARM prepayments are surging.'"

"Also, in Monday's NMN, a story about POA volumes dropping dramatically at Countrywide."

From Bloomberg. "Countrywide Financial Corp., the largest U.S. mortgage lender, is getting buffeted by bondholders as it prepares to sell as much as $4.5 billion of new debt in a slumping housing market. Investors are concerned that Countrywide, based in Calabasas, California, is expanding into the riskiest parts of the mortgage business just as the housing market slows."

"'Bondholders have to ask themselves if it's worth taking the risk' of more bad news about the housing market, said Scott MacDonald, director of research at (a) hedge fund."

"Last month, 4.5 percent of all Countrywide loans had delinquent payments, up from 4.15 percent in August. The increase was caused in part by loans to people with bad credit, and missed payments are likely to continue rising, JPMorgan analysts said."

"Countrywide's banking unit had $34.2 billion of pay-option loans at the end of June. 'They've enabled people to borrow who probably shouldn't have mortgages,' said analyst David Hendler."

From MarketWatch. "With loan loss provisions at the nation's banks at 21-year lows and a cooling real estate market putting some customers in default, certain regional banks may have to boost the amount they put aside to cover bad loans in the third quarter."

"But loan loss allowances, the SEC has argued, can be used by banks to 'manage' earnings as bank managers see fit and, since the Sarbanes-Oxley reforms, the commission has actually encouraged banks not to boost their reserves until a loss becomes inherent in a loan portfolio."

"While pressure from the SEC may be postponing the time of rising reserves, when charge- offs do start rising the impact might be felt faster and more acutely. 'It appears that the SEC believes that actual loan losses should flow through to earnings directly as they occur,' said Punk Ziegel's Dick Bove."

"Banks can sell as asset-backed or mortgage-backed securities and have thus ditched a large part of their portfolio, keeping on average only about 20% of the loans they originate. In the case of supbrime mortgages, where most of the risk is expected to lie, the percentage of loans sold to the market is even larger."

"Moreover, banks can, for a minor charge, move doubtful loans out of their portfolio and put them indefinitely in a 'loan-for-sale' category. 'In there, when you sell it to an investor [at a lower price than the loan was originally worth], you won't take a loan loss but a trading loss, which you can easily offset in other ways,' said David Hendler, analyst at CreditSights."

"The result is that 'it's very hard to predict credit quality' because banks 'give you a managed loan-loss picture,' Hendler added. 'You don't see the true picture.'"

"Meanwhile, investors are already questioning the validity of banks booking as earnings the so-called 'negative amortization' of many mortgages, as banks have little evidence that borrowers will ever be able to pay back the full amount."

"Yet, according to Bove, the Office of the Comptroller of the Currency is also looking into whether booking negative amortization as earnings is valid. An adverse finding could eventually force banks to boost reserves and take charges."

The Orange County Register. "Is it time to refinance? 'It's an incredibly attractive time,' said Al Hensling, head of mortgage brokerage United American Mortgage in Irvine. Hensling said lenders competing aggressively for borrowers amid a cooling housing market are partly responsible for the drop in mortgage rates."

"'They need to originate loans,' Hensling said. 'They have built these operations.'"

"Companies like Countrywide, Wells Fargo and Washington Mutual are calling borrowers whose loans are automatically switching from a fixed rate to an adjustable rate, Pimco's Scott Simon said."

"Lenders expanded staff and facilities during the boom years and need to keep producing, he said. 'In the old days, nobody would call you,' Simon said. He added, 'There is money to be made every time a transaction occurs.'"

"Payment-option loans, which were rarely used before 2003, have become popular amid high home prices. They accounted for 23.6 percent of all home loans for purchases in the county in the first seven months of this year and 37.9 percent of refinancings, according to First American LoanPerformance."

"Yet Hensling and other brokers say homeowners are growing concerned about the loans' risks. Among their pitfalls, the loans generally offer a low starter rate but have a higher adjustable rate behind the scenes, Hensling said. He said owners with option ARMs want to 'step off the roller coaster.'"