Some housing bubble news from Wall Street and Washington. The Financial Times. "H&R Block on Thursday became the latest large financial institution to be hit by the turmoil in subprime mortgages this quarter, as it served up a loss during what is normally its strongest reporting period. The company said it made a quarterly loss of $677 million on discontinued operations, which included Option One as well as writedowns, loss provisions on mortgage loans and the lower prices available for mortgages in the secondary market for mortgages."

From Bloomberg. "Option One, based in Irvine, California, was the eighth- biggest purveyor in the U.S. last year of subprime mortgages. Such loans typically default about six times more often than conventional mortgages. H&R Block had already written down about $250 million linked to bad home loans before the sale to Cerberus was announced as U.S. defaults hit four-year highs."

From Reuters. "H&R Block Inc. said on Thursday the unit's net asset value fell to $1.1 billion as of April 30. That means the takeover value of the business dropped by $300 million, or 21 percent, since Block announced a deal on April 20 to sell the unit to Cerberus."

"'This was a really rough quarter for the subprime industry overall,' H&R Block CEO Mark Ernst said. Ernst noted the unit's value was written down to reflect the continued deterioration of the subprime mortgages market, where defaults among riskier home buyers have risen."

"The fate of two troubled hedge funds managed by Bear Stearns Cos. Inc. was left in question after Merrill Lynch & Co. Inc sold off assets seized from the funds and three other banks closed out their positions with them."

"The Bear Stearns funds once had over $20 billion of assets, but lost billions of dollars from bad bets on securities backed by subprime mortgages. Bear Stearns earlier this week proposed adding $1.5 billion of its capital to the funds as part of a broader restructuring plan, but many Wall Street firms have already headed for the exits."

"'The implications of that extend well outside the market into the real economy, as it would reduce liquidity for mortgages,' said Josh Rosner, managing director of Graham Fisher & Co."

"Merrill Lynch sold securities from the two funds in the broader markets. On Thursday, it plans to sell derivatives, a source said. Merrill Lynch did not sell all of the roughly $850 million of securities it put up for sale, a source said, but it is believed to have sold enough assets to cover its exposure to Bear Stearns."

"Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of America Corp. closed out their positions with the funds, which amounts to selling their positions back to the Bear funds."

"Among the assets for sale by lenders Merrill Lynch and Deutsche Bank were investments in so-called collateralised debt obligations, or CDOs, which pool securities that can include mortgage-backed bonds."

"One mortgage investor said that while the CDO assets for sale carried high credit ratings, they were backed by such risky mortgages as to be 'junk in investment-grade clothing.'"

"'The success of these auctions depends on whether there are hedge funds out there with dry powder and willing to step in,' said one portfolio manager. 'But the fundamentals for this market don’t look good, so either way there’s going to be some blood-letting.'"

The New York Times. "One industry executive, who asked not to be named because of the delicacy of the subject, said the banks involved in the Bear funds could collectively lose $1 billion on their lendings to the Bear funds. While the amount is not itself significant given the size of these banks, it suggests the potential for bigger losses down the road."

"'We have heard that lenders have already reduced the amount that they are willing to lend against C.D.O.’s,' said Timothy Rowe, a portfolio manager at Smith Breeden Associates."

"The two Bear Stearns funds together controlled more than $20 billion a few weeks ago and had about $9 billion in loans as of early yesterday evening in New York, the Wall Street Journal reported today, citing unnamed sources. They'd encountered resistance to a bailout plan, the newspaper reported."

"As defaults rise, bondholders stand to lose as much as $75 billion of subprime-mortgage securities, according to an April estimate from Pacific Investment Management Co., manager of the world's largest bond fund. Investors in all mortgage bonds will probably take about $100 billion in losses, according to a March report from Citigroup Inc. bond analysts."

The Washington Post. "Hugh Moore, a former executive at a subprime mortgage lending company, described the situation as a 'slow train wreck.'"

"'I wouldn't be at all surprised if we hear about more [hedge funds] blowing up in the coming months, as the subprime market meltdown continues,' he said. "You've got $250 billion of subprime [adjustable-rate mortgages] that are going to reset this year.'"

"The perceived risk of owning corporate debt rose worldwide on concern that the paralysis of two hedge funds run by Bear Stearns Cos. may cause a chain reaction that sparks losses for other hedge funds and the banks that finance them."

"Credit-default swaps based on $10 million of debt in the CDX North America Crossover Index of 35 companies surged as much as $10,000 to a nine-month high of $179,000, according to Deutsche Bank AG."

"MGIC Investment Corp., the largest U.S. mortgage insurer, jumped to the highest in more than two months, rising $4,500 to $84,500, according to CMA Datavision. Contracts tied to Irvine, California-based homebuilder Standard Pacific Corp. reached an 11-week high of $423,000, according to CMA Datavision. They closed at $405,000 yesterday."

"'While markets ignored the subprime-mania time bomb since the market shake out in March, it seems to be a longer lasting phenomenon,' said Jochen Felsenheimer, head of credit derivatives strategy at UniCredit Group in Munich. 'In this highly leveraged environment, when the playing field is dominated with hedge funds, the risk is you could get a domino effect. There's the potential for more negative news.'"

"Credit-default swaps are used to bet on a company's ability to repay debt and an increase in the cost indicates worsening perceptions of credit quality."

"Bids for the most recent index of subprime mortgage bonds dropped to a record low for a third time this week on Thursday amid concern that losses at a Bear Stearns hedge fund indicate more widespread turmoil."

From CNN Money. "Besides the prospect of losses piling up, there are also concerns that investors could reduce their appetite for risky bonds and loans. 'In an environment where there are already concerns about credit and liquidity, more risky debt could be undermined,' said Charles Diebel, an analyst at Nomura International."

"While delinquencies on subprime mortgages are on the rise, the losses haven't really hit full force yet on the bonds backed by those mortgages, according to Jeff Schwartz at Payden & Rygel."

"'Rating agencies are downgrading bonds in anticipation of the losses and hedge funds are having to look at these securities and put a value on where the market would price them right now,' he said."

"Last week, credit-rating agency Moody's cut its ratings on 131 bonds backed by subprime mortgage loans because defaults on those loans were rising faster than expected."

From CNBC. "According to Josh Rosner, Managing Director at Graham Fisher & Company, people looking to make investments leveraged to the mortgage or housing market now could find themselves catching a falling knife. He says one of the most important takeaways here could be the culpability of the ratings agencies in all this."

"Janet Tavakoli, President of Tavakoli Structured Finance, also calls the ratings agencies to task, dubbing their recent statements to the public 'borderline irresponsible.' She says telling investors higher rated securities will not likely suffer loss of principal only gives them half the story."

"The consulting firm president points out that investors in all tranches could suffer mark-to-market losses as defaults rise, even if the pools backing their own bonds don’t experience rising defaults."

From Fitch Ratings. "Covenant protection in the U.S. leveraged loan market has declined significantly in 2007, according to a new Fitch Ratings study. This trend is occurring against a backdrop of strong and aggressive overall loan issuance in which the rating mix of new deals coming to market continues to shift toward the riskier end of the credit spectrum."

"Through the first five months of 2007, the share of loans containing a coverage covenant of any type dropped to 44.3% from 68.1% in 2006 and below the 1996-2006 average of 78.1%, while the percentage of loans containing a leverage covenant of any type fell to 51.1%, down from 69.6% in 2006 and below the 1996-2006 average of 72.8%."

"As covenant protections decline, the torrid pace of overall leveraged loan issuance continues. After topping $600 billion in 2006, leveraged loan issuance totaled $217 billion in Q1 2007, a 65% increase over Q1 2006."

"Along with the general demise of covenant packages, the growth of specific 'covenant-lite' loan issuance has accelerated. Through May, $47 billion of covenant-lite transactions, those typically containing no financial covenants, have come to market; more than twice the level of covenant-lite issuance in all of 2006."

"'Demand for these loans is being driven by collateralized loan obligations (CLOs), hedge funds and other non-bank investors who continue to pump liquidity into the market,' said William May, Senior Director, Fitch Credit Market Research. 'These investors appear willing to absorb increasingly protection-lite deals.'"