Some housing bubble news from Washington and the Wall Street Journal. "Merrill Lynch & Co., in a bid to slash its exposure to risky mortgage-backed securities, has engaged in deals with hedge funds that may have been designed to delay the day of reckoning on losses, people close to the situation said. In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said."

"In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return, this person said."

"'Merrill has been making the rounds asking hedge funds to engage in one-year off-balance-sheet credit facilities,' Janet Tavakoli, who consults for investors about derivatives, told clients in a recent note. 'One fund claimed that Merrill was offering a floor return (set buy-back price),' she said in the note, 'so this risk would return to Merrill.'"

"'Ms. Tavakoli said such transactions would explain how Merrill's mortgage-related exposure dropped in the third quarter."

From Bloomberg. "Merrill Lynch & Co. fell the most in more than six years after Deutsche Bank AG said the world's biggest brokerage may write down another $10 billion for losses on subprime assets."

"'We have increasingly lost confidence in the financials of Merrill,' Mayo said in a report today. 'If there are much higher CDO writedowns, Merrill may have additional credit rating downgrades.'"

From Reuters."The risk of owning credit and bonds of Citigroup Inc and Merrill Lynch rose to the highest in at least a year on Friday and Merrill credit default swaps are trading like junk, Moody's Investors Service said."

The Financial Times. "The mood in credit derivatives markets turned ugly on Thursday, with the cost of insuring corporate debt hitting multi-week highs on both sides of the Atlantic. 'It's scary out there - there's blood on the streets,' a trader at a US brokerage said."

"'[These triple-A rated companies are] exposed to the crumbling housing market,' said Gavan Nolan, an analyst at derivatives data provider Markit. 'Investors in monolines will be waiting for the coming months of housing data with trepidation,' Mr Nolan said."

Dow Jones Newswires. "Bond insurers slumped on Thursday amid concern that they may be hobbled by rising defaults on subprime mortgages and downgrades of the asset-backed securities tied to those loans. There's a 'general level of anxiety about whether or not we will continue to see waves of rating agency downgrades of subprime mortgage-backed securities and of collateralized debt obligations,' said Kathleen Shanley, an analyst at Gimme Credit LLC."

"If subprime mortgage defaults and foreclosures get high enough to imperil insurers like Ambac and MBIA, investors will have a lot more to worry about, said Michael Grasher, an analyst at Piper Jaffray."

"'If that were to happen we've all got bigger problems. You, me, the whole world,' he said."

From MarketWatch. "'There is no question that there is stress out there, and we are trying to be reflective of that stress in the marketplace' when rating the creditworthiness of the bonds and other securities it guarantees, Ambac Chief Financial Officer Sean Leonard said Thursday in an interview."

"Leonard noted Thursday that some of the CDOs Ambac guarantees that started out rated double-A have gone down to triple-B, one step above junk status, in the company's own internal rating system."

"The diminished expectations have 'eroded some of the protections we had' against having to pay out on its financial guaranties, he said."

"The expectation is that loans written from late 2005 onward will perform worse than originally expected, though there is still uncertainty over 'what level of poor performance' the later loans in particular will demonstrate."

"Emerging-market bonds fell, as losses related to subprime mortgages prompted investors to shed riskier assets."

"'Losses in financial markets are the main driver,' said Tomasz Stadnik, who helps manage $3.1 billion of emerging-market debt. 'There are rumors on Barclays, and the Merrill Lynch saga continues. It's a sequel to what was happening a few months ago.'"

The Seattle PI. "New York's attorney general has accused Washington Mutual Inc. of pressuring a real estate appraisal company to deliver inflated home values in order to justify making loans."

"The suit filed Thursday in a New York court by Attorney General Andrew Cuomo doesn't name Seattle-based WaMu as a defendant. But WaMu figures prominently in the complaint."

"EAppraiseIT 'improperly allows WaMu's loan production staff to hand-pick appraisers who bring in appraisal values high enough to permit WaMu's loans to close, and improperly permits WaMu to pressure eAppraiseIT appraisers to change appraisal values that are too low to permit loans to close.'"

"'It's about time,' said Richard Hagar, who owns American Home Appraisals on Mercer Island, teaches anti-fraud classes and helped write Washington's mortgage laws. 'I have been surprised that no investigations have been started earlier on something like this.'"

"Graham Albertini, a former WaMu appraiser who now works for Hagar and teaches appraisal classes, said the bank's appraisal process has been increasingly problematic since 2002."

"'Starting in 2002 they shifted the emphasis from quality to quantity,' he said."

"A hot home market caused buyers to bid prices to new heights. Now that prices have started to level off in the Seattle area and decline elsewhere, some buyers are finding they cannot sell their homes for what they owe, leaving them with few alternatives to foreclosure."

"'A lot of this doesn't get revealed until you have a downturn in the housing market,' said Scott Jarvis, director of the state Department of Financial Institutions."

The LA Times. "The fraud suit by New York Atty. Gen. Andrew Cuomo represents the biggest regulatory crackdown yet on the type of allegedly abusive practices that many experts believe fed the housing bubble in California and elsewhere as well as the current rising tide of foreclosures."

"The lawsuit is based on e-mails written by top executives at EAppraiseIT, who initially complained about pressure from Washington Mutual for high appraisals but ultimately acquiesced to it."

"'We have agreed to roll over and just do it,' Anthony R. Merlo Jr., EAppraiseIT's president, wrote in an e-mail to First American executives in February."

"EAppraiseIT acquiesced to Washington Mutual's demands even though it knew that was wrong, according to the suit. 'We view this as a violation' of federal rules, Merlo wrote in an April 17 e-mail."

"In some cases, appraisers were removed from the preferred list if their numbers were too low, the suit said. A Washington Mutual sales assistant told one appraiser he was dumped from the list because he wouldn't boost his assessments, according to the suit."

"'I have been singled out by WaMu and have been pressured on every appraisal I have completed that did not reach a predetermined value,' another appraiser complained to EAppraiseIT. 'I feel that WaMu is in the process of 'blacklisting' me as an approved WaMu appraiser by going after each appraisal I complete and looking for violations.'"

"Excessive appraisals have particularly dire consequences for so-called sub-prime borrowers who have weak or spotty credit, experts say."

"'When reality sets in, as it has today, these buyers, through no fault of their own, now face foreclosure,' said Robert L. Gnaizda, general counsel of Greenlining Institute, a consumer group. 'They're paying for homes that aren't worth anything close to what they paid.'"

"The rate of foreclosures in the United States will remain higher than normal for the next 18 months as the current home loan crisis plays itself out, a senior U.S. Treasury official said on Friday."

"'A rising foreclosure rate during a housing downturn is not surprising, but largely because of lax underwriting in recent years, especially in the subprime market, a higher than usual number of homeowners will face delinquency during the next year and a half,' Robert Steel, undersecretary for domestic finance, told a congressional panel in prepared remarks."

"A top U.S. Treasury official asked for congressional help Friday in reaching out to borrowers with risky mortgages."

"Robert Steel said in prepared remarks to a House Financial Services Committee hearing that a direct-mail campaign to at-risk borrowers is starting up Nov. 19."

"Steel told lawmakers that a group called 'Hope Now' -- composed of mortgage servicers, lenders and counselors -- is reaching out to borrowers to educate them about refinancing options."

"'When you are home in your districts over the weekend or for the holidays, please tell your constituents about this mail campaign,' Steel said. 'Tell them it is OK to contact Hope Now for assistance.'"

"But both the Bush administration and Democrats say they're not in favor of bailouts."

"'We are not talking about any kind of bailout in the sense of public money,' said Rep. Barney Frank, who chairs the House Financial Services Committee. 'We are mitigating pain, we hope,' by offering proposals to help troubled borrowers."

"Rep. Al Green said lawmakers want to help those facing foreclosure but don't want to interfere in the markets. 'We want to let the market do what the market does,' said Green."

"Bill Longbrake, a Washington Mutual executive working on the Hope Now alliance, said the group is sending out 200,000 letters to at-risk homeowners beginning Nov. 19. 'We want to show people that help is available,' Longbrake said."