Some housing bubble news from Wall Street and Washington. Bloomberg, "Home prices fell in one third of U.S. cities last quarter as stricter lending standards caused a 14 percent decline in sales nationwide. Prices dropped in 54 of 150 metropolitan areas in the third quarter and the median sales price tumbled 2 percent nationwide, the National Association of Realtors said today."

"Home sales, including single-family properties and condominiums, slid to 5.42 million at an annualized pace from 6.29 million a year ago."

"Palm Bay, Florida, had the biggest price decline in the third quarter, tumbling 12.4 percent from a year earlier. Sacramento, California, fell 10.5 percent and Sarasota, Florida, dropped 10.4 percent."

The Associated Press. "The Realtors though saw a silver lining in the data, noting that home prices rose in 93 of the 150 metropolitan areas surveyed."

"'Some metro areas are hot while others are experiencing localized problems,' Lawrence Yun, the group's chief economist, said in a statement. 'Home prices in the vast midsection of America, from the Appalachians to the Rockies, are affordable and, perhaps, even undervalued.'"

"Freddie Mac, the second-largest U.S. mortgage-finance company, may need to raise as much as $6 billion to bolster its capital amid the worst housing slump in at least 16 years."

"The government-chartered company yesterday said it would seek more reserves in a 'large transaction,' after reporting its biggest quarterly loss. The amount may be $5.5 billion to $6 billion, according to Fox-Pitt Kelton analyst Howard Shapiro. Friedman Billings Ramsey analyst Paul Miller and Gary Gordon, an analyst at Portales Partners LLC in New York, predict $5 billion."

"'It's not going to be a small number,' said Gordon."

"'This is a disaster for the broader mortgage capital markets,' said Shapiro. 'To the extent that Fannie Mae and Freddie Mac cannot grow, you are taking even more liquidity out of the markets.'"

"Shares of Freddie Mac plunged almost 30 percent after it said it must set aside $1.2 billion to account for bad loans. The mortgage market shuddered at Freddie's loss, coming just days after a $1.4 billion quarterly deficit was revealed by Fannie Mae, its bigger government-sponsored rival."

"Especially troubling to investors is that the remedies Freddie Mac is considering would add to the strain on the housing market, analysts say."

"They 'have provided essential liquidity in a time of crisis,' Shapiro wrote. The loss of their role to ensure the mortgage markets are liquid will result in 'a further exacerbation of the housing downturn — even less credit available and steeper downturns in home prices.'"

"Despite Freddie's own bleak assessment of its performance, equity and debt analysts still questioned whether executives were being overly optimistic in forecasting future losses, and investors punished the company's shares as a result."

"Ratings agencies also chimed in: Fitch Ratings and Standard & Poor's Ratings Services both warned that they may cut Freddie's AA- credit rating on its preferred stock."

"'These guys are supposed to be the best credit evaluators in the world. And it looks like they're getting caught a little off guard along with everyone else,' says equity analyst Paul Miller of Friedman, Billings, Ramsey."

"In all, Freddie recorded $4.4 billion and $4.3 billion, respectively, in unrealized losses on its securities and derivatives during the third quarter. Those are losses the company generally considers temporary and do not flow through earnings."

"Analysts worry that Freddie's default and loss assumptions might be too optimistic and that those losses may not be temporary."

"'The loss severity they talked about was 26% to 30%' on all loans says Joshua Rosner, managing director of Graham Fisher & Co. 'While it sounds like a very high number, relative to history, that's not the peak,' he adds."

"Loan loss rates of '25% to 30%, given the historically unprecedented bursting of a real estate bubble, is not either conservative nor would it be unrealistic to expect. Given the deterioration in conditions, the severity could be significantly higher than that.'"

The LA Times. "Freddie Mac would play a key role in plans to provide more funding for home loans. One proposal would lift the current $417,000 ceiling on mortgages that Freddie Mac and its sister company Fannie Mae can buy, a move long sought by lenders in states such as California with high home prices."

"But that idea may be jeopardized by rising losses in the loan portfolios held by Freddie Mac and Fannie Mae, some experts said."

"'Their opponents will ask, 'Why should we give them new powers when they can't even manage the risks they have?' said Jaret Seiberg, an analyst at Stanford Group in Washington."

"Countrywide Financial Corp. survived the first phase of the mortgage meltdown this summer thanks in part to a $2-billion investment from Bank of America."

"But the Calabasas-based lender suffered a major new setback Tuesday when mortgage giant Freddie Mac posted a big loss and said it needed new capital -- which could curb Countrywide's ability to make loans."

"'Countrywide's survival strategy has depended on access to the secondary markets' -- the companies that, like Fannie Mae and Freddie Mac, buy loans and bundle them into securities for sale, analyst Shapiro wrote. The approach won't work so well when Freddie Mac and Fannie Mae 'are capital-constrained and may need to shrink.'"

"As losses mount at Fannie and Freddie, they will have to compensate by raising those fees to lenders, an extra charge that Countrywide may have trouble bearing, said Frederick Cannon, an analyst at Keefe, Bruyette & Woods."

"'The question is whether Countrywide can pass the extra costs on to borrowers,' Cannon said."

"BofA made a $2-billion investment in Countrywide to gain access to its efficient loan-generation and customer-service operations. The decline in Countrywide's shares has now left BofA down $858 million at Tuesday's closing price. BofA declined to comment."

"The risk of banks defaulting on their debt rose to the highest on record as losses by mortgage finance company Freddie Mac fueled concern that lenders will add to more than $50 billion of writedowns worldwide."

"'Everything is signaling that the market may switch to panic mode,' Philip Gisdakis, a credit analyst at UniCredit SpA in Munich, said in an interview today. 'The news flow is so bad and there is no relief in sight.'"

From Reuters. "U.S. mortgage applications fell last week, with demand for both refinancing and home purchase falling, an industry group said on Wednesday."

"'We have this multifaceted, Jenga tower of hurdles starting from the dust and plywood production stage and running all the way through clearing the mortgages to their final investor,' Gregory Miller, chief economist at SunTrust Bank, Atlanta, said of the precarious U.S. housing market."

"Builders can't move homes. Buyers are 'left with gnawing fears that they'll wake up with buyer's remorse,' that their home value soon drop in value even from the discount they managed to score. On top of that, 'the purchaser has to go find a mortgage and standards are higher,' he said."

From Marketplace. "The Office of Thrift Supervision reported today that earnings for the nation's savings and loans plunged 84 percent in the third quarter."

"JILL BARSHAY: 'Investors piled into savings and loan stocks in August. Back then they looked like a safe haven from the subprime mess. Scott Polakoff is the chief operating officer at the Office of Thrift Supervision. He says S&L earnings fell 84 percent in the third quarter.'"

"SCOTT POLAKOFF: 'It's been a long time since we've seen that kind of drop -- almost 15 or 16 years ago.'"

"Polakoff says large thrifts who sell mortgages to investors took some of the biggest losses. They had to write down some of the mortgages on their books when they couldn't sell the loans."

"Polakoff says thrift execs think the housing market will get worse. They've diverted money away from this year's profits to cover future mortgage defaults. Over the next 12 to 18 months, some consumers may find it a lot harder to get a loan."

From Barrons. "ACA Capital. a leading insurer of sub-prime mortgage-bond securitizations, is drawing relentlessly closer to 'bagel-land,' that dismal place where a stock's price is zero."

"The proximate cause of this slide was the disclosure on Nov. 9 that Standard & Poor's had put ACA on negative Creditwatch and might cut its credit rating from the current single-A."

"Any rating below single-A-minus would force the insurer to post margin of $1.7 billion or more on its $25 billion book of subprime collateralized mortgage obligations, to reflect the mark-to-market losses that it has already acknowledged on this portfolio."

"The demise of ACA would embarrass its roster of institutional owners, including Bear Stearns' Merchant Bank, hedge fund Perry Capital and the Third Avenue mutual-fund concern."

"ACA has long been a convenient dumping ground in which major subprime securitizers like Bear Stearns, Citigroup, Merrill Lynch and some 25 other prominent dealers could pitch billions of dollars of risky obligations for modest premiums. That let them gussy up their balance sheets and shift any potential mark-to-market hits to ACA."

"If ACA Capital were to founder, more than $69 billion worth of CDOs, including the $25 billion in subprime paper, would come rumbling back to the Wall Street banks, and likely with heavy attendant losses."

"Big-name investment banks are taking a financial beating this year, leaving many Americans to ask: Just how did all these Wall Street bankers in their $5,000 John Lobb shoes manage to step in you-know-what?"

"Individual investors frequently lose money by chasing past returns. Investment banks did just that amid the booming housing market. They mirrored each other's moves as they raced into ever-shakier lending. Some estimates suggest that collectively they'll lose more than $400 billion."

"'They are basically a herd of sheep. They all go into it together,' said A. Gary Shilling, a financial consultant who warned in 2005 and 2006 of troubles to come. In the 1980s, banks followed each other into massive Latin American debt. Later, he said, they all got burned together by losses in manufactured housing."

"In hindsight, the risks from an overheated housing market seem obvious. But in a now-famous July interview with London's Financial Times, then-Citigroup CEO Charles Prince appeared to confirm the sheep metaphor when he shrugged off the imminent danger."

"'When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing,' he said."

"Most Wall Street investment banks made the same fundamental miscalculation made by many average Americans who bought second homes or vacation properties as investments."

"That mistake was assuming that home prices might flatten but wouldn't fall. Individuals believed they couldn't go wrong. Investment banks concluded the same, relying on complicated financial models dating back to the 1930s that showed that home prices defy the laws of gravity."

"'They didn't realize that with rising house prices, things look very good, but they were lending to people that couldn't afford chicken coops but were in four-bedroom homes,' said Shilling."