Some housing bubble news from Wall Street and Washington. CNN Money, "Existing home sales are likely to see more declines in coming months as a key reading of pending deals fell to nearly a six-year low in May, a real estate group said Tuesday. The National Association of Realtors said its index of pending home sales, which reflects homes under contract, sank to 97.7 in May from 101.2 in April. The latest reading is 13.3 percent lower than May 2006."

"Lawrence Yun, the Realtors' senior economist, said home sales continue to be hit by tighter lending criteria... and a lack of buyer confidence in the market. 'Some transactions are being postponed from mortgage market disruptions,' he said in the group's report. 'But better supervised lending will put housing in a fundamentally healthier state over the long term.'"

"The Pending Home Sales Index in the West was 13.7 percent below a year ago. In the Northeast, the index is 9.6 percent lower than May 2006. The index in the South fell 15.4 percent below a year ago. In the Midwest, the index dropped 11.7 percent below May 2006."

From Bloomberg. "Today's report showed that the May reading was the lowest level since September 2001, when the economy was in the midst of the last recession. April pending home resales were revised to a decline of 3.5 percent."

"'Housing has yet to find a bottom,' said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, whose forecast was closest to the May reading."

From CNBC. "A really interesting report out from Karen Weaver, et al, at Deutsche Bank does a great job of showing how the national home price 'decline' number means absolutely nothing to the greater housing market. This report shows how local large MSA’s (metropolitan statistical areas) are ground zero for price corrections thanks to a change in the profile of the subprime borrower."

"'The subprime mortgage borrower was really the marginal buyer, and...the marginal buyer is the one who very much set prices so this borrower was the marginal buyer of real estate,' says Weaver. 'Last year for example, subprime and Alt-A was about 40% of all purchases. Now the marginal buyer, the subprime guy is running into a lot of trouble. We see foreclosures rising rapidly in that subset and that marginal buyer is now becoming the marginal seller, and that's enough to re-price the whole housing market.'"

"These, not surprisingly, are the cities seeing some of the steepest price declines, from 8-15%, forget that 1-3% national price drop we all keep hyping."

The Associated Press. "Here's a scary thought about the housing market: Things may be far worse than what's already being revealed by the troubling government and industry statistics."

"At issue is what goes into sales price data and what does not. When those numbers are crunched, many of the incentives that sellers are using to lure buyers, including cash rebates, aren't being included. That suggests prices may be falling faster in many markets than is now being reported."

"Miami-based Lennar Corp., for instance, has offered to purchase furniture for buyers. Sales incentives at Lennar, one of the nation's biggest home builders, averaged $43,700 a home in its second fiscal quarter, up from $24,700 in the similar quarter last year."

"And it isn't just builders piling on the incentives. It's spilling over to the existing-home and foreclosure market, too. In Miami Shores last year a seller promised a Jaguar X-Type 3.0 sports car to anyone who would take his asking price."

"John Devaney, who invests in subprime mortgage bonds, restricted redemptions to protect some of his Horizon Strategy hedge funds from being forced to sell assets."

"It's 'a defensive move because we had an unusually high number of redemption requests and we didn't want to be a forced seller in this market,' Michael Gregory, a spokesman for Devaney's United Capital Markets Holdings Inc. said yesterday."

"One investor who wanted to withdraw accounted for about 25 percent of the funds' money, he said. United Capital, based in Key Biscayne, Florida, oversaw $620 million in its fund group as of March 31 and $266 million in its money-losing Horizon ABS funds, an April investor letter said."

"Assets managed by hedge funds globally more than doubled in the past five years to almost $1.6 trillion as of the first quarter, according to Hedge Fund Research."

"While securities backed by risky loans were bought 'by a wide range of smaller banks, pension funds, insurance companies, hedge funds, other funds and even individuals,' hedge funds might be the 'most exposed,' the Bank for International Settlements said in its annual report dated June 24."

"'Who now holds these risks, and can they manage them adequately?' the Basel, Switzerland-based BIS asked. 'The honest answer is that we do not know.'"

The Seattle Times. "In April, as he shut down the 300-employee mortgage business he'd built from scratch, Layne Sapp said he hoped to find a buyer who would resuscitate MILA."

"Instead, the Mountlake Terrace firm Monday asked the federal bankruptcy court to protect it from its creditors, joining scores of other lenders felled by the subprime-mortgage implosion."

"Some $76 million in unsecured debt was claimed by some of the nation's biggest lenders. Among them are Bear Stearns, with a $21 million claim; GMAC/RFC, $10.5 million; and Goldman Sachs Mortgage, $6.8 million."

"Others with multimillion-dollar claims include Wachovia Mortgage, Deutsche Bank, Countrywide Home Loans and Indymac Bank. All have asked Mortgage Investment Lending Associates (MILA) to buy back mortgages that presumably did not meet their standards."

"Late payments on home equity loans climbed to a 1 1/2-year high in the opening quarter of this year. The American Bankers Association reported Tuesday that late payments on home equity loans rose to 2.15 percent in the January-to-March quarter. That was up sharply from 1.92 percent in the final quarter of last year and was the highest since the late summer of 2005."

"'There are still signs of consumer financial distress, which will continue throughout most of this year as the worst of the housing problem works its way through the economy,' said James Chessen, the association's chief economist."

The Financial Post. "Just a few weeks ago it was all sunny skies amid galloping global growth. The warnings are now flowing thick and fast."

"Donald Coxe, global portfolio strategist for BMO Financial Group believes the market for fiendishly clever debt instruments will implode like all previous financial fashions from Third World bank loans to derivatives dreamt up by Nobel laureates."

"'In this decade it is collateralized debt products that seek to make risk disappear from cash markets into a tower inhabited by investment banks and hedge funds in which the shared language is algorithms,' he wrote in his recent publication Basic Points. 'Like all past Babels, this one will, at some point, self-destruct.'"

"Bear Stearns, and other CDO players with subprime exposure are hedged largely against the ABX index, a synthetic financial security used by investors to specifically hedge subprime risk, said Dominic Konstam, head of the interest rate group at Credit Suisse First Boston."

"This does not mean however, that a financial institution or two may not take a hit or that the recoil in the market won't hit investor sentiment, Mr. Konstam said."

"The latest buzzword floating around bond desks? 'Crediteering' as in, 'There will be a lot more crediteering going on,' or more selective choice of credit."

"'From the Fed's perspective that's okay,' he said 'In the extreme that becomes a market failure but in its own right that's quite healthy.'"

From Reuters. "Fidelity fund manager Anthony Bolton has likened the market in collateralised debt obligations (CDOs) to the controversial split-capital trust sector, and warned on the methods used by some activist hedge funds."

"Bolton, one of the UK's most respected managers, said while the development of packages of debt such as CDOs has helped spread risk, they nevertheless pose a large investment risk. 'I still think there are major risks with these -- CDOs, CLOs (collaterised loan obligations),' he said."

"'They are basically based on a model, which is based on a set of assumptions. It's very difficult to say 'it's always like this.' If something goes wrong with the assumptions, it changes the model,' he said."

"'It reminds me a lot of split-level investment trusts. They were based on models and assumptions, and it turned out the models were wrong and that led to the collapses. I think what will happen is that the prime brokers won't allow valuations based on models. They will require valuations based on the market and that will be a mechanism leading to more reality,'"

"U.S. Treasury Secretary Henry Paulson said on Monday the U.S. housing market correction was 'at or near the bottom' although it could be some time before an upturn."

"'No one is forecasting when, with any degree of clarity, that the upturn is going to come other than it's at or near the bottom,' he said.'We are making this transition successfully (from) a growth rate that wasn't sustainable to one that is sustainable,' Paulson said."

"Paulson, who was chairman of Goldman Sachs Group Inc. before taking the top Treasury post last year, said he monitored financial markets closely, and aside from the subprime situation, they remained healthy. 'Markets are volatile,' he said. 'I haven't seen a single thing that surprises me; it's hard to surprise me.'"