Some housing bubble news from Wall Street and Washington. MarketWatch, "Home-building bellwether D.R. Horton Inc. early Tuesday said quarterly orders for new homes fell 40% from a year earlier and that it expects to post a loss after impairment charges. 'Market conditions for new home sales declined in our June quarter as inventory levels of both new and existing homes remained high, and we expect the housing environment to remain challenging,' said D.R. Horton Chairman Donald Horton in a statement."

"He said the builder lowered its prices in response to sagging sales. The company expects to see a loss for both the third quarter and the nine months ended June 30, after charges."

"D.R. Horton said its cancellation rate for the quarter was 38%, up from 32% in the fiscal second quarter. During the company's last quarterly conference call in April, executives said the historic rate was about 16% to 20%."

"'People put a house under contract with a contingency to sell their existing home and then they weren't able to sell their existing home,' said Stacey Dwyer, D.R. Horton's treasurer. 'Or people who put a house under contract either just changed their mind and decided not to buy right now or find a better deal somewhere.'"

From Dow Jones Newswire. "Horton added that although the company expects to report a profit from operations before impairments for the quarter, 'we will realize significant asset impairments.'"

"On a regional basis, the value of orders in California dropped 62% to $307.1 million during the third quarter. The value of orders in the Southwest fell 54% to $409.2 million; in the Northeast, the value of orders fell 40% to $308.3 million."

From Reuters. "'D.R. Horton was as aggressive as anyone in buying land during the bubble years,' said Eric Landry, analyst at Morningstar. 'They bought plenty of land when land prices were dear. Home prices now have declined such that there are several communities that aren't profitable.'"

From Bloomberg. "D.R. Horton said...the average price for its houses slid 12 percent to $233,672. 'All these companies face a lot of pressure,' said Thomas Smith, an equity analyst at Standard & Poor's. 'It's a tidal wave of trouble.'"

"'We believe housing operating fundamentals are likely to get worse before they get better given still significant levels of oversupply, coupled with first full-quarter impact from the subprime debacle and the corresponding tightening in underwriting standards,' Robert Stevenson, an analyst at Morgan Stanley, said in a report today."

"D.R. Horton's impairment charges will be at least $250 million to $300 million after tax for the quarter, Stevenson estimates."

From CNN Money. "Home improvement retailer Home Depot cut its 2007 profit outlook Tuesday, citing continued weakness in the home building market and the sales of its supply business."

"In a conference call with investors and analysts to discuss the company's financial update, CEO Frank Blake said he felt it was reasonable to project that there was still more of '[a housing correction] ahead of us.'"

"Blake warned that the housing market woes could stretch beyond 2007. 'Housing turnover is one of the key determinants of our business and activity related to it drives about 20 to 25 percent of [customer expenditure],' Blake said. 'Housing inventory is now at about 5 million units. It will take time to burn that off. Therefore we expect to see continued headwinds into 2008.'"

"Standard & Poor's said it may cut the credit ratings on $12 billion of bonds backed by subprime mortgages, prompting investors to dump the securities."

"'S&P's actions are going to force a lot more people to come to Jesus,' said Christopher Whalen, an analyst at Institutional Risk Analytics. 'When a ratings agency puts a whole class on watch, it will force all the credit officers to get off their butts and reevaluate everything. This could be one of the triggers we've been waiting for.'"

"Investors criticized S&P, Moody's Investors Service and Fitch Ratings because their ratings on bonds backed by mortgages to people with poor or limited credit don't reflect the fastest default rate in a decade. Prices of some bonds backed by subprime mortgages have declined by more than 50 cents on the dollar in the past few months while their credit ratings haven't changed."

"'We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress,' S&P said. 'Weakness in the property markets continues to exacerbate losses, with little prospect for improvement in the near term.'"

"'We do not foresee the poor performance abating,' S&P said. 'Loss rates, which are being fueled by shifting patterns in loss behavior and further evidence of lower underwriting standards and misrepresentations in the mortgage market, remain in excess of historical precedents and our initial assumptions.'"

"Declines in the ABX index indicate that investors believe the bonds are worth less than their ratings suggest. 'If you look at where the market was trading these bonds, they weren't trading like BBB bonds,' said David Land, a portfolio manager in at Advantus Capital Management, which owns $783 million of mortgage bonds."

"S&P said it is acting now because many bonds issued in late 2005 and most of 2006 now have 'sufficient seasoning' to show delinquency, default and loss trends that indicated 'weak future credit performance.'"

"S&P also said doubt had been cast over some data it used after the Mortgage Asset Research Institute reported mortgage fraud had risen above industry highs."

"'The loan performance associated with the data to date has been anomalous in a way that calls into question the accuracy of some of the initial data provided to us,' S&P said."

"Standard & Poor's just drove a huge harpoon into the heart of the mortgage credit bubble and it's going to take a long time to clean up the mess once the beast finally dies."

"The bigger news is that S&P isn't going along with the charade any more. S&P said it would change its methodology for ratings on not only hundreds of billions of dollars in residential mortgage-backed securities, but also on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans."

"A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices."

"'The focus this morning is on S&P and the fact that they have basically put all ratings of pending securitizations on hold. It's not clear as to why they have taken this action, but while the cloud of uncertainty exists it will weigh on an already fragile market,' said (a) trader."

"'Higher margin requirements for financed ABS and CDO positions and concerns over forthcoming forced CDO liquidations have put further selling pressure on ABX prices,' said Christopher Flanagan, analyst at JP Morgan, noting the index is frequently used as a hedge for long risk positions."

"U.S. credit default swap spreads hit their widest levels this year on Tuesday because of fears of rating downgrades of subprime mortgage securities and weakness in the European credit market, market sources said."

"'We're definitely at our widest for the year,' said Melody Vogelmann, credit strategist at Barclays Capital."

The Wall Street Journal. "Moody's and other credit-rating firms are again taking heat for the meltdown in the subprime-mortgage market."

"Together with some analysts and academics who believe the rating agencies played a key role in the subprime crisis by giving high ratings to thousands of bonds that fell quickly in value, some short sellers also are wagering that legislators, regulators and disgruntled investors will shake up the existing oligopoly structure and put an end to its fat margins and profits."

"'It's a great business model as long as you can get people to pay for it,' says James Chanos, president of a New York hedge fund with about $3 billion in assets that specializes in short selling. 'If they have no predictive power over that which they're rating, then why bother?'"

"In a paper co-written with Joshua Rosner, an independent research analyst, Prof. Mason argues that the ratings agencies, including Standard & Poor's Corp. and Fitch Ratings, as well as Moody's, are deeply involved with investment-bank underwriters in structuring pools of assets, which places them in a more active role than simply publishing opinions on the creditworthiness of the underlying assets."

"U.S. home sales in 2007 will drop to their lowest level since the start of the five-year housing boom in 2001 as mortgage rates and foreclosures increase, according to a forecast by Freddie Mac."

"Several risks,- the elevated levels of homes for sale, recent increases in mortgage rates, and rising foreclosures of subprime borrowers, point to continued weakness in the months ahead,' Freddie Mac Chief Economist Frank Nothaft said in the forecast."

"'The recent sharp increase in mortgage rates is tapping the brakes on the housing market just when we had expected to see the bottom of the cycle,' Nothaft said."

"More than two million subprime adjustable rate mortgages (ARMs) are poised to reset at much higher rates in coming months, worsening an already suffering housing market.'

"Borrowers who took out hybrid ARMs in 2004 and 2005 to secure low 'teaser' rates for the first two or three years of the loan may see their monthly mortgage payments climb by 35 percent or more."

"'In October alone more than $50 billion in ARMs will reset,' according to Mark Zandi, chief economist and co-founder of Moody's Economy.com. That's a record, according to Zandi."

"One of the reasons for the worsening situation, according to Zandi, is that just as the number of subprime ARMs being underwritten was reaching a high, the quality of loans was hitting new lows. 'There were increasingly poor quality loans made starting in the spring of 2005,' he said, 'with the poorest of all made during the fall of 2006.'"

"'Lenders wanted to keep the pipeline flowing,' said Zandi, 'and were hopeful that prices would grow again.'"

"Subprime ARM lending was most common in some of those once red-hot areas. According to Zandi, three quarters of all those loans were made in the California, Nevada, Arizona, Florida and Massachusetts markets. 'Prices there are falling quickly, particularly in Florida and Las Vegas,' he said."