Some housing bubble news from Wall Street and Washingotn. Reuters, "Facing continued deterioration in the U.S. housing market, upscale home builder Hovnanian Enterprises Inc. said on Monday that it expects to take a charge of $90 million to $110 million related to land impairments and write-offs. The third-quarter cancellation rate was 35 percent, compared with 33 percent a year earlier."

"On a preliminary basis, net new contracts for homes fell 24 percent, excluding unconsolidated joint ventures."

From MarketWatch. "In announcing limited results before its full quarterly report scheduled for Sept. 6, the company cited 'continued deterioration in sales pace and pricing in certain communities.' The company said it closed on 3,179 homes for the three months ended July 31, down 31% from the year-ago quarter."

"The company said its cancellation rate represented 35% of gross contracts, underscoring the tough times in residential housing markets."

"Banc of America Securities analyst Daniel Oppenheim said that it appeared Hovnanian saw more weakness at the start of the quarter and that management lowered home prices to maintain sales volume."

"''However, we think the recent challenges in the mortgage market have led to worsening trends once again,' the analyst wrote in a report to clients. 'We expect the cancellation rate to continue to worsen in [the company's fiscal fourth quarter] as a result of the tighter lending, which started at the end of July,' he added."

The Star Telegram. "D.R. Horton used to say that only another Great Depression could stall its growth. It's clear now that Horton bulked up at the wrong time, doubling its land position as the housing market was hitting its peak and not long before demand plummeted."

"Sales have been in a free fall and, for the first time, the red ink is flowing."

"Horton, the nation's largest home builder, has tried myriad ways to stave off the housing downturn, without success. The company has eliminated 3,300 jobs, punted 60 percent of its option deals on land lots, slashed home prices, boosted buyer incentives, and bullied suppliers and subcontractors."

"In April, it ordered division presidents to do whatever was necessary to hit sales targets. Instead of rebounding, Horton home sales fell 40 percent in the quarter ended in June. Nearly 4 of 10 buyers also walked away from their contracts."

"'D.R. Horton doesn't see strength in any of its markets right now,' CEO Don Tomnitz told analysts recently. 'You hate to say it, [but the decline] is actually a little bit worse than [it] appears.'"

"In the West, excluding California, Horton sales fell 39 percent. In California, the decline was 53 percent. The best performer, the Southeast, was down 25 percent."

"A whole class of home borrowers who could get easy money a few years ago can't get any loans now. 'If you told shoppers at Wal-Mart that they couldn't use Visa or MasterCard for six months, many wouldn't be able to buy anything,' said Mark Dotzour, chief economist for the Texas A&M Real Estate Center."

"Horton and others, it turns out, couldn't resist the excesses of a market bubble. Now we'll see how they work them off."

The San Francisco Chronicle. "Kerry Killinger is chairman and CEO of Seattle's Washington Mutual Inc. Killinger met with Chronicle reporters and editors at a time when turmoil from the subprime market meltdown was beginning to spread to other parts of the financial and housing markets."

"Q: In broad terms, could you tell us your impression of what happened in the mortgage market and how it happened? Foreclosure activity is increasing as adjustable-rate loans are reset. Who is to blame?"

"A: 'House price appreciation in the United States was significantly above normal for several years...That led to price increases growing above average. That then accelerated into a bit of a bubble as speculators came into the market thinking that housing was going to increase in value at an above-average rate forever. The market peaked about two years ago. Simply, prices were rising much faster than they should have.'"

"Q: Why would anyone make a stated-income loan in the first place? Why would a practice like that ever become the norm? A: 'From competitive pressures, from significant excess of capital flooding into the business from Wall Street. That's really what it was. Severe competitive pressures leading to a loosening of underwriting standards for the industry.'"

"Q: Other people were making them, everybody was on the boat? A: Very much. And the boat, again, the loans in the underwriting were predominantly being pushed by the money flooding in from Wall Street that wanted to buy the loans...we really pulled our horns in at the same time that Wall Street money was just flooding us.'"

"Q: And yet you've been making 2/28 and 3/27 loans up until last month? (These loans have a low interest rate for two or three years but then reset. Monthly payments can go up by hundreds of dollars.)"

"A: 'But at significantly lower volumes. We tried to reduce our participation. The conclusion we have made is that the slowdown in housing prices and the risk of the housing market have increased this year, making the 2/28 and the 3/27 products less appropriate than they'd been in the past. Those products worked well when housing prices were continuing to increase.'"

The Rocky Moutain News. "The home buyers on Main Street...are feeling the brunt of what happened on Wall Street. 'The best I can tell, mortgage bankers needed to find a way to prop up their loan volume a few years ago and decided to relax their underwriting standards a bit,' said broker Brian Bartlett, in an e-mail to the Rocky Mountain News."

"'Then, as these higher risk loans were packaged (on Wall Street) and gobbled up by investors chasing higher yields, the bankers kept incrementally relaxing underwriting a bit at a time. . . . The assumption was made that increasing market values would offset the risks. That didn't happen,' he said."

"'It's back to the future,' said Lou Barnes, president of Boulder-based Boulder West Financial Services."

"'In the last nine months, the marketplace eliminated 25 percent of the worst nouveau lending practices, and in the last two weeks, the market eliminated the other 75 percent,' Barnes added. 'We set the clock back 10 years in two weeks.'"

"Peter Lansing, president of Universal Lending, who four years ago lost business by shunning 'funny money' lending, said he has never seen such turmoil in the market in 30 years in the business."

"'I really believe this is a pretty big watershed event in the mortgage banking business that is going to change the face of mortgage banking back to normal lending practices - that sounds like an oxymoron, a watershed event that takes us back to what is normal,' Lansing said."

"Realtor Bartlett thinks the hangover from the easy money party is not something that will end soon. 'The final effects and ramifications won't be seen for months or years,' Bartlett said."

The Financial Post. "Peter Morici has little sympathy for investors snared in the U.S. subprime mortgage meltdown."

"Mr. Morici, the former chief economist for U.S. International Trade Commission and now a business professor at the University of Maryland's School of Business, lays the blame squarely on what he calls the 'sinfully wealthy Barons of Wall Street' who tried to pull off 'an Ivy League Ponzi scheme.'"

"The recent market meltdown had much less to do with bad subprime loans than advertised," he says. 'It was caused more fundamentally by excesses at hedge-and private-equity funds.''

"In other words, inventors of these funds...attempted to pair put-and-call options with borrowed money. Under normal circumstances, he argues, these 'buy-sell pairings' can work in smaller markets since computers can establish patterns of stocks and other investment vehicles moving in different directions and then cash in on the difference or spread."

"'But when hedge funds multiply, they essentially bet against one another and require one another to validate their bets,' he says. It was doomed to failure, he says."

The Financial Times. "The much-heralded financial rocket scientists responsible for the explosion in complex mathematical trading strategies are bracing themselves for fresh pain after what one team of analysts called 'the perfect storm' last week."

"Quantitative strategists, or 'quants' as they are known, attempt to profit from pricing inefficiencies identified through mathematical models. These send buy and sell signals on small variations in price between different securities."

"One hedge funds manager said the average quantitative fund manager was down about 15 per cent in the first few days of August."

"'Nothing seems to be working. Previously uncorrelated factors have recently been falling with the same pace, leaving investors with very few places to hide,' said Citigroup analysts in a report to clients last week."

"One hedge fund manager estimated that statistical arbitrage funds with more than $100bn in assets had on average borrowed four times their actual assets. These borrowings magnify significantly any moves they may make in the market."

"The wave of selling only exacerbated the problem by pushing down prices. As asset values fell, the ratio of debt to assets rose. This forced them to sell yet more assets."

"One hedge fund manager said: 'Nobody is happy with their credit position and everyone wants to de-risk and de-leverage. And it is global. The market has gone freaky.'"

From Newsweek. "An idea for a morality play: capture the madness of an era when investors, entranced by new technology, a novel set of economic assumptions and an all-powerful Federal Reserve, lost their heads, blew an exuberant bubble and suffered a painful bust."

"It is, in a way, the Henny Youngman Economy. Lenders pleaded: 'Take my money ... please!'"

"And this credit boom rested on the staunch belief in three pillars of faith, all of which, coincidentally, underlay the 1990s boom. Pillar #1. Technology. Pillar #2. Asset prices continually rise."

"Pillar #3. In a pinch, the Federal Reserve would step in with a well-timed interest-rate cut, just as it did after various 1990s crises, flooding the system with cheap money."

"As low rates proliferated, lenders fell over themselves to stuff cash in customers' pockets. Bankers proved similarly accommodating to corporations, especially to private-equity firms."

"It all worked fantastically well. But this year, one by one, the pillars underlying the Henny Youngman Economy crumbled. The securitization of subprime mortgages had the perverse effect of tethering more investors around the globe to the same crumbling assets."

"Home prices fell nationwide for the first time in a generation, according to the Case-Shiller Index. And Alan Greenspan's replacement, Bernanke, revealed himself to be more concerned with the prospects of inflation than with the prospect of unemployment among hedge-fund managers."

"Chagrined lenders have been gripped by the sudden realization that debt can, and does, go bad. So just as rapidly as they rushed to lower standards, mortgage companies—the ones that remain solvent—and lenders of all types are rushing to tighten them."

"Credit, the fuel that powers the economy, is becoming more scarce and expensive. Somewhere, in the great borscht belt in the sky, Henny Youngman is hoisting his violin."