Some housing bubble news from Wall Street and Washington. BBC, "Finance firm GMAC has had to take out a $21.4 bn loan as it becomes the latest lender to reveal the impact of the US sub-prime mortgage crisis. GMAC, which has borrowed the cash from Citigroup, said boosting its financial flexibility was 'a prudent measure' in the current market environment."

"GMAC's struggling home lending unit, Residential Capital, lost $254m in the three months to the end of June. A key problem is that sub-prime loans are often repacked into wider debt groupings which are then resold. This means that no-one is yet quite sure of the full impact of the woes."

The Financial Post. "Against a backdrop of spreading fallout from the ongoing turmoil in global credit markets, two major business leaders yesterday warned of more ugliness yet to come for the North American economy."

"Speaking in an interview, Ray McDaniel, CEO of Moody's Corp., said the crunch time for the U.S. sub-prime mortgage sector is only now getting going. 'We are just at the beginning of the peak mortgage reset period,' Mr. McDaniel said."

The Globe and Mail. "As a former Wall Street insider, John Talbott has a better appreciation than most for how large financial institutions operate. And what he senses now is a massive effort to conceal the extent of the toxic sludge buried beneath some of the biggest names in the business."

"'Everybody is hiding and not disclosing losses,' he says. 'They're all winking and nodding at each other because they've all got this stuff on their books.'"

"The subprime meltdown has been described as a liquidity squeeze, which makes it sound like a temporary problem that can be cured with an injection of cash. But the problem is far more serious, he says."

"'Giving a bank more cash doesn't solve the problem. What they're sitting on is huge losses and they can't recognize those losses without endangering their entire book equity and threatening bankruptcy and threatening a run on the banks, he said."

From Reuters. "Central banks are ready to prevent a major financial shock if necessary, Bank of England chief Mervyn King said on Wednesday, as U.S. Treasury Secretary Henry Paulson predicted no quick end to the credit crisis."

"King said ongoing market upheaval was caused by mispricing of risk and central banks had to be wary of moral hazard, encouraging investors to feel they can act without risk by stepping in every time things turn bad."

"'If risk continues to be underpriced, the next period of turmoil will be on an even bigger scale,' King said in a submission to the British parliament's Treasury Committee."

"Paulson said the uncertainty in financial markets would last longer than the turmoil that followed the Asian financial crisis and the Russian default of the 1990s, or the Latin American debt crisis of the 1980s, the Financial Times reported."

"He said the complexity and global distribution of securities could prolong the crisis, stemming from mass defaults on 'subprime' U.S. mortgages. 'We expect this period of turbulence to go on for a while,' the newspaper quoted him as saying in Washington."

The New York Times. "'What’s going on is a repricing of risk across the capital markets,' Mr. Paulson told reporters."

"The Federal Reserve chairman, Ben S. Bernanke, said on Tuesday that a high savings rate among oil-producing nations and Asian countries continued to help depress interest rates by keeping financial markets flush with cash."

"But Mr. Bernanke warned against banking on the steady flow of cheap money — which helped stoke overly lax mortgage lending and the recently punctured housing bubble — over the long term."

"Mr. Bernanke (cautioned) that the flood of cheap capital from abroad was likely to taper off in the decades ahead, possibly leading to higher interest rates, as countries like China save less and consume more."

"'The logic of the global savings glut suggests that, as the glut dissipates over the next few decades and thereby reduces the net supply of financial capital from emerging market countries, real interest rates should rise,' he said."

"Some economists now believe that the flood of foreign money, some of it from investors seeking higher yields in the United States, contributed to the speculative bubble in housing prices and the explosive growth in high-risk mortgages that helped finance it."

"Others contend that the Federal Reserve played a major role as well, by cutting short-term interest rates to rock-bottom lows after the stock market’s fall in 2000 and the recession in 2001."

"Subprime borrowers had trouble refinancing mortgages because loan programs were no longer available, according to a poll of 1,744 brokers in the last week of August by Campbell Communications."

"About 5 million adjustable-rate mortgages are slated to reset to higher rates in the next 18 months, according to Lehman Brothers."

"Lenders cut off credit to customers at an especially fast rate in August as many investors stopped buying the debt banks use to finance home loans. Commenting on business in the weeks ahead, 14 percent of brokers said they had no available lender for subprime loans at all, said Thomas Popik, the author of the survey."

"'The question is not what home sales are doing now, but what will happen three to four months from now' as the lack of lender funding in August filters down, Popik said."

"Broker customers with subprime, or weak, credit faced the most problems, with 64 percent unable to refinance their ARMs in August, the survey said. Half of prime borrowers were turned away from ARM refinancing, it said."

"Countrywide Financial Corp. has sharply reduced its subprime lending, which may exacerbate refinancing troubles because many brokers were depending on the No. 1 U.S. mortgage lender, Popik said."

"The Campbell survey also found that a third of home purchase closings were canceled in August. Loan closings were canceled for 56 percent of subprime borrowers in the month amid failed approvals, while closings for 21 percent of home buyers with good credit were foiled."

The Wall Street Journal. "Thousands of homeowners face an 'imminent risk' of losing their homes because of clashes between American Home Mortgage Investment Corp. and its former financial backers, according to Freddie Mac, a government-chartered housing financier."

"In court documents, American Home said Ginnie Mae representatives 'stood in a line in front of the doors and sat on the stairs, preventing AHM Servicing employees from entering the office.' Freddie Mac said American Home 'had its security personnel escort the Freddie Mac representatives out.'"

"In addition to Freddie Mac and Ginnie Mae, several Wall Street banks are fighting to extract their loans from American Home's servicing operation."

"'What's occurred is that we have the money, but AHM hasn't been able to or willing to pay the taxes and insurance, and they have the loan records,' said Ginnie Mae's senior VP, Theodore B. Foster. 'Therefore, we don't know who to pay, and we don't know how much.'"

"Orleans Homebuilders, Inc. fiscal year 2007 residential property revenue decreased 34% for the prior year period. The Company experienced a cancellation rate of approximately 23% for the year ended June 30, 2007. Fiscal year 2007 net loss was $66.9 million."

"As a result of a various factors...the Company recorded a pre-tax charge in the fiscal year 2007 fourth quarter related to inventory impairments of $19.3 million."

"The increasing uncertainty with respect to the overall mortgage market, including the jumbo and Alt-A mortgage markets, may further reduce demand for our homes and require the increased use of sales incentives to overcome negative buyer sentiment."

"The McMansion may be shrinking. With the nation's housing market in a slump and the mortgage market in disarray, many home builders are putting up fewer supersize homes and offering smaller floor plans. That seems to be what buyers suddenly want in an era of high prices and tougher financing."

"'Financing has tightened down so much that many people aren't able to qualify for the larger houses,' said Kathryn Boyce, an account executive in Northern California for Hanley Wood Market Intelligence. 'Throughout the U.S. people can't afford what they previously did. Floor plans are going to get smaller.'"

"Recently, turmoil in the mortgage market has made it harder for buyers to qualify for bigger loans. This is causing builders to redraw their blueprints. After reducing prices on their current inventories of unsold homes, the next step is to 'start building to a new market. That new market is a lower price point at a smaller size. To the extent they can do it, they will,' said Kermit Baker, chief economist at the American Institute of Architects."

"Jeffrey Mezger, CEO of Los Angeles-based KB Home, said the change has been 'driven by data on what our home buyers want and what they can afford in a new home.'"

"Even Toll Brothers Inc., known for its sprawling suburban 'McMansions,' recognizes that buyers may want smaller homes. Kira McCarron, the company's chief marketing officer, said Toll doesn't track home size, but she concedes that there 'probably is more demand for 3,000- versus 6,000-square-foot,' homes."

"Ms. McCarron added, 'It's not that people don't want or can't afford [big houses]. It's that they're afraid of them now -- it's a confidence issue more than an affordability issue.'"

"In some cases, home builders are making the shift to smaller, less costly homes in existing subdivisions, angering homeowners who bought large homes during an earlier stage of the project's development."

"David Raidman moved into his 2,760-square-foot lake-front home in Fort Pierce, Fla., last fall in the first phase of a gated community developed by Lennar Corp. of Miami. Mr. Raidman said he was told that his home would be surrounded by similarly sized and priced homes. But when he heard Lennar was planning to build much smaller homes in his neighborhood, he and other homeowners fought the company's plans."

"Although Lennar agreed not to build the smallest of its new models -- at just 1,326 square feet -- next to the larger ones, the home builder has continued with its plans to downsize."

"'Our biggest concern is what it would do to the value of our homes,' said Mr. Raidman, who doubts he can sell his home today for the $300,000 he paid for it last year. Standing on his back porch, he can look out across the lake and see at least six newer, smaller homes. 'The garage looks bigger than the house,' he said."

"But while home builders are aware that customers increasingly want smaller, cheaper homes, and in some cases can't afford anything else, building those homes eats into their profits, often because of the high price they paid for the land the homes are built on. That leaves them having to hope for higher sales volume to offset their reduced margins."

"Some welcome the downsizing trend, including author Sarah Susanka. Since 1997 Ms. Susanka has written several best-selling books extolling the virtues of 'The Not-So-Big House,' and she says she has recently been attracting more interest from home builders. 'I used to be asked all the time why would anybody want to downsize? People thought I was crazy,' she said. 'Now it's becoming much more mainstream.'"