Some housing bubble news from Wall Street and Washington. Bloomberg, "U.S. banking regulators told mortgage lenders to tighten standards for subprime home loans in a belated effort to end abuses that led to a surge in defaults and the highest foreclosure rate in five years. Lenders, in most cases, should verify income levels instead of relying on borrowers' statements, the Federal Reserve and other banking regulators said in guidelines issued today."

"They also said banks should account for potential interest-rate increases in scrutinizing whether homebuyers can pay off loans."

"'This guidance on adjustable-rate mortgages underscores that the Federal Reserve and other banking regulators expect lenders to make sure subprime borrowers not only can afford their monthly payments while the introductory rate is in effect, but also after the interest rate resets,' Fed Governor Randall Kroszner said in an e-mailed statement. 'It is the right thing to do for the borrowers' sake.'"

"Fraud increased and lending standards fell as Americans borrowed $2.8 trillion for home loans from 2004 to 2006, the largest mortgage boom of any three-year period on record."

"Banking regulators issued their guidelines even as the market for subprime mortgages is contracting. Subprime loans fell 10.3 percent to $722 billion in 2006 from a record $805 billion in 2005, according to JPMorgan Chase & Co. Credit Suisse Group predicts loans will fall as much as 60 percent this year."

From Reuters. "Subprime borrowers should not be penalized for refinancing out of a mortgage before the interest rate resets to a higher level, according to a statement of principles issued by the regulators. The guidelines also call for lenders to warn borrowers when a reset is coming and grant them at least 60 days to refinance."

From MarketWatch. "The new rules do not include a 'suitability standard.' That is, borrowers will continue to be responsible for making sure that they choose appropriate loans for their needs and circumstances."

"The regulators noted that they will take action against institutions that exhibit predatory lending practices, violate consumer protection laws or fair lending laws, engage in unfair or deceptive acts or practices, or otherwise engage in unsafe or unsound lending practices."

"The Fed has been criticized by consumer advocacy groups and some lawmakers for not taking action sooner."

"American Home Mortgage Investment Corp. forecast a second-quarter loss late Thursday because of rising delinquencies on some of its mortgages."

"The company, which offers fixed-rate and adjustable-rate mortgages and so-called Alt-A loans, also withdrew its full-year guidance and said it obtained an investment from $9 billion hedge fund firm Marathon Asset Management LLC."

"Charges related to delinquencies on mortgage loans will be 'substantial' during the second quarter, American Home explained."

"American Home shares have been hit hard by a jump in mortgage delinquencies, falling 40% so far this year. The company...has specialized in adjustable-rate mortgages and Alt-A loans, which often require less or no documentation of a home buyer's income. See story on first-quarter results."

"American Home said late Thursday that credit problems have mainly been caused by its strategy of offering three-month 'timely payment' warranties to investors who bought stated-income loans with high loan-to-value ratios from the company."

"As more borrowers fell behind on payments quickly, American Home has had to buy back those loans from investors."

The Journal Sentinel. "Allco Credit Union posted a loss of more than $5.2 million in the first quarter of this year and is facing a wave of delinquent loans, a report by regulators shows."

"Many of the soured loans are related to mortgage loans. Allco board Chairman Eric Hofhine said in a written statement that 'Allco has not been immune from the effects of subprime lending.'"

"Allco, which has about 6,600 members and assets of $75 million, was listed in the quarterly report by the National Credit Union Administration, or NCUA, as 'significantly undercapitalized.'"

From Business Week. "It's white-knuckle time on Wall Street as firms try to prevent the subprime mess from spreading. The hedge fund blowup has suddenly thrown the world's biggest financial institutions into a game of brinkmanship."

"A shotgun sale of poorly performing securities would provide Wall Street with a true price for valuing the slumping assets. 'Nobody wants to officially acknowledge the worthless nature of these products,' says Peter Schiff, president of Euro Pacific Capital."

"If Bear's holdings were auctioned off at, say, 60 cents on the dollar and other firms marked down their so-called collateralized debt obligations (CDOs): complex bonds often backed by subprime loans accordingly, losses would spread. Firms would start dumping their CDOs to get what they could for them. Thus would begin a quick, brutal crash."

"There's another force bearing down on CDO holders: credit rating agencies such as Moody's Investors Service and Standard & Poor's. If the ratings agencies were to downgrade the CDOs, it would force holders to mark down their values accordingly, potentially igniting the same sort of disaster scenario."

"Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans."

"Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg."

"Downgrades of CDOs 'could finally force the hand of ratings-sensitive holders,' Morgan Stanley analysts led by Vishwanath Tirupattur in New York wrote in a reported dated June 28. 'Our worry is that this selling would be very unbalanced, with no established taker of risk on the other side, even at current market levels.'"

"More than 15 percent of the mortgages in the securities are at least 60 days delinquent and another 8 percent are in foreclosure, according to the bond trustee."

"Ratings downgrades in CDOs containing asset-backed securities 'are inevitable and material,' the Morgan Stanley analysts said in the report. 'The shoe is still waiting to drop.'"

"A total of 11 percent of the loan collateral for all subprime mortgage bonds had payments at least 90 days late, were in foreclosure or had the underlying property seized, according to a June 1 report by Friedman, Billings, Ramsey Group Inca. In May 2005, that amount was 5.4 percent."

"CDOs aren't required to disclose the contents of their holdings to the U.S. Securities and Exchange Commission and most can change them after the bonds are sold."

"'A lot of these should be downgraded sooner rather than later,' said Jeff Given at John Hancock Advisors, who oversees $3.5 billion of mortgage bonds. The ratings companies may be embarrassed to downgrade the bonds, he said. 'It's easier to say two years from now that you were wrong on a rating than it is to say you were wrong five months after you rated it.'"

"'We remain nervous about the end of the week, when many leveraged investors in the CDO markets will have to mark down their positions,' debt strategists at Barclays Capital in New York said in a June 28 report. 'The worry is that this will be large enough to trigger margin calls which, in turn, will cause other liquidations and so on.'"

"Some investors say the ratings companies are waiting too long before downgrading the mortgage bonds and the CDOs that contain them. They noted that S&P and Moody's maintained their investment-grade ranking on Enron Corp. until days before the Houston-based energy trader filed for bankruptcy."

The Financial Times. "Dealers and investors who trade US subprime mortgage derivatives have rejected a proposed change to the terms of derivatives contracts from a hedge fund group concerned about possible manipulation of their value by investment banks."

"Tess Weil, partner at law firm Purrington Moody, said: 'The fear of a lot of participants is that [Paulson’s] approach goes well beyond securities laws protections and would have the effect of chilling the market just when it needs transparency and efficiency.'"

"Michael Waldorf, a senior VP at Paulson, told the Financial Times that manipulation of mortgage derivatives could occur when banks purchase bad loans out of mortgage-backed bonds."

"'Mortgage-backed securities are supposed to be passive vehicles, so injecting cash into them in this way is nothing less than fixing the outcome,' said Mr Waldorf."

From Realtor Magazine. "Consumers are hearing a lot in the media about the correction in housing, and they’re understandably concerned about whether now is a good time to get into the housing market. To a great extent, we can thank steady media coverage of the real estate market 'correction' for unfounded consumer concerns."

"But there’s no real correction where consumers are concerned. The media aren’t making the distinction between what’s happening to you, fewer home sales, fewer homes coming online, and what’s happening to consumers, more buying opportunities. But you can make that distinction for your customers."