Some housing bubble news from Wall Street and Washington. "Reflecting further housing troubles, sales of existing homes fell in May to the lowest level in four years while the median home price dropped for a record 10th consecutive month. The National Association of Realtors reported Monday that sales of existing single-family homes and condominiums dropped to 5.99 million units in May, the slowest sales pace since June of 2003."

"The median price of a home sold last month dropped to $223,700, down 2.1 percent from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch of weakness on record."

"In a troubling sign for the future, the inventory of unsold homes rose by 5 percent to 4.43 million units in May, a level that would take 8.9 months to clear out at the May sales pace. That is the highest inventory level since the last deep slump in housing in 1992."

"The current slump in housing is the worst since the 1989-92 downturn. It is occurring after a prolonged boom that saw sales of new and existing homes set new records for five consecutive years."

From CNN Money. "Even the Realtors' statement conceded the weakness in the current housing market."

"'The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices,' said Lawrence Yun, the Realtors' senior economist, in the report. 'It appears some buyers are simply waiting for more signs of stability before they get serious about getting into the market.'"

"The glut of homes for sale on the market rose 5 percent from April to 4.4 million homes. The number of homes for sale is now 23 percent above year-ago levels, and the inventory, is nearly 40 percent above a year year earlier."

From MarketWatch. "The inventory figure compared with 8.4 months in April and 7.4 months in March. Inventories of homes on the market rose to a record 4.43 million. That's the biggest overhang of inventory since June 1992, at the tail end of the last housing bust."

"'Psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers,' said Lawrence Yun, senior economist for the realtors group."

From USA Today. "The Realtors are predicting that the median home price will decline 1.3% this year while sales are forecast to drop 4.6%. It would be the first annual price decline in four decades of record-keeping."

"'Household formation has slowed dramatically since late 2006, implying that many people are doubling-up,' adding roommates or moving in with parents, said Yun."

"Regionally, existing-home sales in the Northeast are 3.5 percent lower than May 2006. Existing-home sales in the Midwest are 6.6 percent below a year ago. Existing-home sales in the West are 16.3 percent below May 2006. Existing-home sales in the South are 11.9 percent below a year ago."

The New York Times. "The American housing market, as measured by home-building activity, is falling at the most rapid rate in decades, underscoring the pain felt by builders who were far too optimistic about the state of the market."

"Even with the plunge, however, starts have been very high relative to the number of homes that builders are trying to sell, a fact that could indicate the weakness will last while builders seek to sell homes they have already built."

"The rapid fall clearly caught builders by surprise, in part because many of them had never seen anything like it. During the period covered by the charts, going back to 1990, the fastest fall had been in 1991, when the pace fell 18 percent during a recession."

"There have been such rapid declines before, but not in the memory of most current builders. In 1975, amid the most severe recession since the Great Depression, the decline was 37 percent, the highest recorded since the government started collecting the statistics in 1963. There was also a large drop in 1982, during a recession that came when interest rates were extraordinarily high."

"The inventory of new homes for sale rose to the highest level ever last summer, at 573,000 homes in July, and has since begun to fall, going down to 538,000 in April."

"But that figure was equal to 40 percent of the home starts in the previous year, the highest level ever."

The Wall Street Journal. "Bond investors will keep one eye on the Federal Reserve and the other on the mortgage market this week, as they wait for the next installment of the drama surrounding two troubled Bear Stearns Cos. hedge funds that bet heavily on the subprime-mortgage market."

"'The crisis will continue to loom large,' said T.J. Marta, fixed-income strategist at RBC Capital Markets. While the situation seems to be under control for now, 'that could turn on a dime.'"

"Michael Cheah, portfolio manager at AIG SunAmerica Asset Management, said the Bear funds were most probably not alone in the bets they made on the subprime-mortgage market. 'A lot of people have got that trade on,' he said. 'I would be shocked if they were the only one...and the story ends here. It's not over.'"

"Late Friday the riskiest, triple-B-minus, tranche of the benchmark derivative index based on subprime mortgages hit a new low of 58 cents on the dollar, according to Alex Pritchartt, a trader at UBS."

"The latest version of the ABX, which is renewed every six months, references loans originated in the second half of 2006, a year noteworthy for its loose lending standards."

From Bloomberg. "Bear Stearns's enhanced fund and the Bear Stearns High- Grade Structured Credit Fund, a similar pool that wasn't as highly leveraged, speculated mostly in collateralized debt obligations, securities that hold pieces of junk-rated corporate bonds, mortgage bonds, high-interest loans, derivatives or even other CDOs."

"Sales of CDOs skyrocketed to $503 billion in 2006, according to estimates from Morgan Stanley. Ralph Cioffi, the funds' manager at Bear Stearns, was among the biggest buyers of CDOs backed by subprime mortgages."

"While some layers of CDOs are designed to earn higher credit ratings than their underlying investments, the securities are hard to value and can decline precipitously. That's what happened earlier this year as defaults on subprime loans accelerated."

"Then an additional bet Cioffi had made to protect his investors, using derivative contracts on ABX indexes to hedge against a decline in the subprime market, also went bad. By the end of April, the enhanced Bear Stearns fund was down more than 20 percent for the year."

"'They looked at these high yields, this growing market, and they forgot the basic concept of risk and return,' Sanders said. 'They got caught drinking their own Kool-Aid.'"

"As creditors began asking the funds to post more collateral to back the loans in mid-June, Cioffi sold about $4 billion of the funds' holdings to stave off a cash crunch."

"The gambit failed. Lenders led by New York-based Merrill, the third-largest U.S. securities firm by market value, threatened to declare the funds in default of repo agreements and seize investments."

"JPMorgan, Goldman Sachs Group Inc. and Bank of America Corp. reached agreements with Bear Stearns Asset Management that involved settling the difference between repo debts and money the funds were owed from hedging contracts, according to people who were briefed on the dealings or heard them described on conference calls."

"At about 3 p.m. (on June 21), Bear Stearns offered an unconditional bailout for the high-grade fund. The bailout of the Bear Stearns fund is the largest since Long-Term Capital Management, which received more than $3.6 billion in 1998."

National Mortgage News. "Bear has not filed any type of SEC statement regarding these funds, has it? Bear is a public company. The hedge funds are not. We know this: Merrill Lynch, which does not screw around with deadbeat borrowers, told Bear on Wednesday enough is enough: you either post more collateral or we're seizing the assets collateralizing our loan. Guess what? Bear said go ahead. Merrill said fine."

"By the way, here's the first few sentences from our February story on Merrill's margin calls: Merrill Lynch, which has been stung by three high-profile subprime bankruptcies in six weeks, is conducting margin calls on certain B&C originators that receive financing through the firm's warehouse group."

"One secondary market official, requesting anonymity, said Merrill is the 'main culprit' in the current buyback plague sweeping the subprime industry. He added, 'Merrill is making originators pay dearly.'"

"The margin calls, which require that these lenders post additional capital, were confirmed by two mortgage bankers and a spokesman for Merrill."

"On Thursday, six 'scratch and dent' deals hit the secondary market, one trader told NMN. He said the offerings of delinquent residential mortgages range from $2.8 million to $34 million. 'It's pretty much your standard day,' he added."

"Queen's Walk Investment Ltd., a fund investing in the riskiest portions of bonds backed by mortgages, reported a net loss caused by the slump in the U.S. subprime market and fewer U.K. borrowers paying penalty charges." "The fund said it lost $91 million in the year ending March 31. Queen's Walk sold most of its holdings in the U.S. mortgage market in the first three months of the year, it said today in a statement."

"'We are disappointed with the performance,' Stuart Fiertz, a founder of hedge-fund manager Cheyne Capital, said in a phone interview."

"Queen's Walk is the second U.K.-listed fund to report losses because of rising delinquencies in the U.S. mortgage market, after London-based Caliber Global Investment Ltd. last month said it lost $8.8 million. Bank of America Corp. last week said hedge fund losses at Bear Stearns Cos. may be the 'tipping point of a broader fallout' from the subprime market."

"The losses were caused by 'significant developments' in the U.S. and U.K. mortgage markets, the statement today said. Queen's Walk increased forecasts of losses on its U.S. assets because of 'weaker housing market fundamentals,' according to the fund's statement."

The Telegraph. "The Bank for International Settlements has warned that years of loose monetary policy has fuelled a dangerous credit bubble, leaving the global economy more vulnerable to another 1930s-style slump than generally understood."

"'Virtually nobody foresaw the Great Depression of the 1930s, or the crises which affected Japan and Southeast Asia in the early and late 1990s. In fact, each downturn was preceded by a period of non-inflationary growth exuberant enough to lead many commentators to suggest that a 'new era' had arrived,' said the bank."

"In a thinly-veiled rebuke to the US Federal Reserve, the BIS said central banks were starting to doubt the wisdom of letting asset bubbles build up on the assumption that they could safely be 'cleaned up' afterwards, which was more or less the strategy pursued by former Fed chief Alan Greenspan after the dotcom bust."

"It said this approach had failed in the US in 1930 and in Japan in 1991 because excess debt and investment build up in the boom years had suffocating effects. While cutting interest rates in such a crisis may help, it has the effect of transferring wealth from creditors to debtors and 'sowing the seeds for more serious problems further ahead.'"

"The BIS said last year's record issuance of $470bn in collateralized debt obligations (CDO), and a further $524bn in 'synthetic' CDOs had effectively opened the lending taps even further. 'Mortgage credit has become more available and on easier terms to borrowers almost everywhere. Only in recent months has the downside become more apparent,' it said."

"'Sooner or later the credit cycle will turn and default rates will begin to rise,' said the bank."