Some housing bubble news from Wall Street and Washington. Associated Press, "Construction activity plunged in July by the biggest amount in six months. The Commerce Department reported housing activity fell by 1.4 percent, more than double the 0.6 percent decline in June, and has now declined for a record 17 straight months as home building suffers through its worst slump in 16 years."

From Bloomberg. "Homebuilders are scaling back to try to trim the glut of unsold residential properties even as companies are still adding offices and factories. We're going to see another leg down, mostly because of the pain the big builders are taking, said Ken Mayland, president of ClearView Economics LLC. 'The full effects of the market volatility really haven't found their way into housing yet. The August declines may be even bigger.'"

"Federal Reserve officials got an earful from critics at a weekend retreat arguing they should use regulation and interest rates to prevent asset-price bubbles."

"Otmar Issing, former chief economist at the European Central Bank, and Stanley Fischer, head of the Bank of Israel, were among guests at the Fed's summer symposium in Jackson Hole, Wyoming, to challenge the hands-off approach."

"'The position that 'this isn't an issue for central banks' has lost some support,' Issing said in an interview at the gathering. 'The tide is turning.'"

"'Central banks, probably on more occasions than they would like to admit, should respond to asset-price bubbles,' said Fischer, who taught economics at the Massachusetts Institute of Technology Fed Chairman Ben S. Bernanke worked on doctorate (a) there in the 1970s."

"James Hamilton, an economist and former Fed research adviser, warned that if the central bank doesn't tackle the loose lending standards that contributed to the housing bubble, politicians will, potentially doing more damage. U.S. legislators blame the central bank for insufficient action to stop predatory lending practices."

"'It would be wise for the Federal Reserve to be clear on exactly what changes in regulatory authority could help prevent a replay of these developments and pre-position itself as the advocate to get these implemented now,' said Hamilton, a professor at the University of California at San Diego."

From Reuters. "In rare public criticism of Alan Greenspan, a former government official who authored a famous rule of central bank policy said on Saturday that ultra-low Federal Reserve interest rates had stoked the U.S. housing boom and subsequent bust."

"'A higher federal funds path would have avoided much of the housing boom,' said John Taylor, former U.S. undersecretary for international affairs. 'The analysis also suggests that the reversal of the boom and thereby the resulting market turmoil would not have been as sharp.'"

"Taylor argued...the unusually prolonged period of low Fed rates were misinterpreted by financial markets as a lasting change in the Fed's policy responses to inflation -- further evidence that the U.S. central bank is to blame for the housing debacle."

"'A key lesson here is that large deviations from business-as-usual policy rules are difficult for market participants to deal with and can lead to surprising changes in other responses in the economy,' Taylor said."

"Federal Reserve policy makers underestimated the role that housing plays in triggering recessions and merit an 'F' grade for their failure, said Ed Leamer, director of an economic forecasting group at UCLA."

"'Something's wrong here,' Leamer wrote in a paper presented to a conference in Jackson Hole. Leamer said in an interview today at Jackson Hole that some former 'hot markets,' such as pockets of California, may see declines of 30 percent to 40 percent."

"In his paper, Leamer said 'highly stimulative' monetary policy helped stoke a 'hot' housing market. 'This is an event which I think to a large extent was preventable.'"

"'The best time to fight the housing cycle with tight monetary policy is when the wave is starting to rise, not when it is cresting,' Leamer wrote. 'The worst time to stimulate the economy with loose monetary policy is when the wave is starting to rise. That is going to make the crest all the higher, and the crash all the more catastrophic.'"

"He added that there's 'very little possibility that a rate cut would make much of a difference' at this point. 'Once the wave has peaked and is crashing, there is not much that can be done to quiet the waters.'"

"Would cheaper money relieve the anxiety in financial markets about shoddy mortgages and declining home prices?"

"'The reason there isn't a market for these credits is that people don't know what price they should be trading at,' said Leamer. 'That's not going to be affected by a small change in the federal funds rate.'"

"Other experts attributed the real estate frenzy to other factors, in particular to an explosion of exotic mortgages that allowed people with low incomes and weak credit to buy houses with no money down and deceptively low initial payments."

"'It's too easy to blame the Fed,' said Robert Shiller of Yale. Shiller blamed mass psychology for the bubble, an almost ubiquitous conviction that housing prices would simply keep climbing at double-digit rates."

"Freddie Mac, one of the largest providers of financing for U.S. home mortgages, on Tuesday said it broke from its plan to sell one if its standard mortgage securities each quarter amid a glut of securities in the market."

"Supply in the $7.2 trillion mortgage bond market over the past two months has ballooned as investors have cooled to purchases of even 'AAA' rated securities."

"'We and the dealers that we work with are seeing a market with considerable supply with all fixed-income programs' said Michael Cosgrove, a Freddie Mac spokesman. 'At this time it doesn't make sense to provide more supply to the market.'"

The LA Times. "A year ago, Countrywide Financial Corp. CEO Angelo R. Mozilo was boasting that the looming shakeout in home prices and hike in mortgage interest rates would usher in a period of remarkable prosperity for his company."

"Today, the picture looks much different. The tone of executives' comments has gone from complacent to almost apocalyptic. The company's traditional frames of reference for the performance of its loan portfolio, he added, may no longer be 'a fair comparison in light of what is happening to real estate values.'"

"As for loans that the company has packaged and sold to investors in the bond market and on which it retains some liability for defaults, executives said in July that it was too early to say what those losses will be. David Sambol, the company's president, told analysts in July that it was 'providing for future losses [in its mortgage portfolio] at a level that is greater than anything that we have ever seen.'"

"Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007."

"'There really had not been for our models...very much in the way of historical empiricals' to help Countrywide compile accurate predictions, Sambol said."

"Mortgage lender NovaStar Financial Inc. said Tuesday it was all but eliminating sales of new loans and will lay off more than 30 percent of its work force as it deals with continued deterioration in the mortgage market."

"'In better times for the industry, operating a sizable mortgage banking business to feed loans into the portfolio made strategic sense. But the secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs for this difficult environment,' said CEO Scott Hartman, in a news release."

"NovaStar canceled a rights offering designed to raise $101.2 million for the subprime mortgage lender and said its auditor expressed doubt about the company's survival."

"Deloitte & Touche LLP told NovaStar it wouldn't be associated with the rights offering unless the company made additional disclosures, according to a NovaStar statement today. The changes would include 'an explanatory paragraph about the uncertainty of NovaStar's ability to continue as a 'going concern,' NovaStar said."

"The U.S. subprime crisis could herald tighter mortgage policies in Europe and retail lenders could be especially reluctant to grant 100 percent loans on property purchases, analysts said."

"Arturo de Frias, chief banking analyst at Dresdner Kleinwort in London, forecast a 'widening of spreads but that is good for the sector. There will be more differentiation between what is more and less risky.'"

"'If there is less availability of credit in general, there will be less availability of mortgages,' said Alan Webborn at SG Securities in London. 'It is likely the terms will be tougher and a little more restrictive.'"

"In Italy, lenders could become stricter with new categories of borrowers, such as employees on temporary contracts, and reduce loan-to-value ratios for borrowers in general to 80 percent from near total coverage."

The Independent. "Bullish Finance Minister Brian Cowen has said that the current turmoil in the property market is 'neither unwelcome nor surprising' despite plummeting house prices around the country."

"In comments which will renew questions over his stewardship of the nation's finances, Mr Cowen has rejected claims that his policy of 'cooling down' the property market has badly backfired."

"The difficulties in the Irish property market were highlighted last week at a new housing development in Delgany, Co Wicklow, where people who bought houses for €700,000 have been shocked to learn that new houses of similar design on the same estate are now being sold for €595,000 -- a drop of €105,000."

"'For most people, the value of their house is a constant factor. It is a home to live in, not an investment to be tracked like price changes on the stock market,' he declared."

"Mr Cowen claimed there is now much better value both in the new and secondhand market than a year ago. 'A climate of price moderation is a far more comfortable place for buyers than a market driven by hype. Even home owners trading up or down who may take longer to sell will be in a better position as buyers than in an overheated market,' he asserted."

"'The recent turnaround from unsustainable house price escalation in 2005/2006 should be neither surprising nor unwelcome. It is in everyone's interest that the housing market should evolve to an orderly and sustainable growth pattern, in terms of prices, lending and output,' he added."

National Mortgage News. "National Mortgage News is publishing its exclusive ranking of the nation's top subprime lenders in 2Q -- and the news isn't pretty. Mortgage bankers originated a paltry $53.4 billion in subprime loans during the second quarter, the industry's worst showing in five years."

"Here's just one of many startling facts in the story: subprime accounted for just 6.3% of all home mortgages originated in the quarter, compared to 20.4% for all of 2006."

"First Horizon mortgage chief Jerry Baker recently sent out an e-mail to his employees. He wrote, 'This situation quickly evolved to a complete investor pullback from purchasing any form of loan or credit product or pool of products extended by banks and other financial institutions for virtually any purpose...Over the last several weeks the result has been that there have been almost no buyers for credit or debt products at any price.'"

"Friedman Billings Ramsey on the mortgage insurance industry: the outlook 'over the next six to 12 months continues to be challenging. The most significant near-term issues facing the space, in our opinion, are (1) the chance of more-onerous capital standards from the rating agencies, (2) the potential for earlier-than-expected loss development eclipsing near-term revenue and (3) worsening home price depreciation impacting loss severity.'"

"The California Association of Mortgage Brokers recently held its annual convention. The exhibit hall had 110 booths. About 15 of them were empty because of no-shows…"