Some housing bubble news from Wall Street and Washingon. Bloomberg, "H&R Block Inc. shut its subprime home-lending unit and will cut 620 jobs after an agreement to sell Option One Mortgage Corp. to Cerberus Capital Management LP unraveled. H&R Block will try to sell the portion of Option One that does billing and collections, the company said today in a statement. The decision may result in $200 million in pretax charges."

"Chairman Richard Breeden is trying to salvage part of the sale of Option One begun by his predecessor Mark Ernst, who once predicted the entire company would fetch $1.3 billion."

"'The company is determined to complete our exit from subprime mortgage lending without further delay, and today's action largely completes that objective,' Breeden said in today's statement."

"'This is not a market where people are willing to step up and assume risks that may be unquantifiable, and that was the albatross around the neck of Option One,' said David Roberts, who oversees $20 million for Harvest Investment Advisors, including H&R Block shares."

The New York Times. "On Monday, Treasury Secretary Henry M. Paulson Jr. said he hoped to reach agreement this week with lenders and institutional investors on a plan to temporarily freeze the teaser rates for certain qualified borrowers. But industry analysts and executives were skeptical about the government’s ability to produce a high-speed approach to handling thousands of cases with a few simple principles."

"'There is no cookie-cutter approach that can be taken to this,' said Bert Ely, a longtime banking consultant. 'This is going to be a mess. I hear the tone of a mandate. It’s government-mandated collusion.'"

"According to the broad outlines of the plan, the Treasury will divide subprime borrowers into four groups. Group 4 includes those who can continue to make their mortgage payments if the teaser rate stays in effect or the maturity of the loan is extended. For this category, and this category alone, help is on the way."

"How do you spell b-u-r-e-a-u-c-r-a-t-i-c n-i-g-h-t-m-a-r-e? If fraud was widespread during the housing bubble, the current plan has its own set of incentives. 'People will come up with eight ways of rearranging their finances to stay in Group 4,' said Ram Bhagavatula, managing director at a New York hedge fund."

"More to the point, 'this policy solution smells of the tenets of Marxism: from each according to his ability to each according to his need,' he said."

"If you think getting mortgage servicers and investers to agree on an outcome is tough, just wait until the lawyers get involved."

"'The modification of existing contracts, without the full and willing agreement of all parties to these contracts, risks significant erosion of 200 years of contract law,' said Joshua Rosner, managing director at an independent research firm in New York."

"While Paulson has been busy devising a plan that limits the damage to the economy without encouraging more risk-taking in the future, 'Treasury hasn't thought through' one aspect of the plan, Rosner said: the implication for Fannie Mae and Freddie Mac, the two government-sponsored mortgage behemoths."

"'Guess who's the largest single holder of AAA notes? Fannie and Freddie,' he said."

"The way these CDO structures are set up, defaults in underlying mortgages trip certain triggers that serve to protect senior noteholders. If the plan inhibits defaults, 'the cash flows that should be reserved for the AAA holders will end up going to the residual owners,' Rosner said. 'Treasury is pushing a plan that could cause more losses at already weakened Fannie and Freddie.'"

"Aside from violating the sanctity of a contract and scaring off potential investors, what's the good news here? 'It's a big misconception to think that (mortgage) resets are responsible for the delinquencies,' said Andy Laperriere, a managing director at the ISI Group in Washington."

"Of the subprime loans made in 2006 and scheduled to reset in 2008, some 25 percent are already delinquent, he said. 'What's driving the delinquencies is that people can't afford the initial payments,' Laperriere said."

"That's a problem Paulson's plan won't fix."

From Reuters. "Top executives from four of the world's biggest banks told British lawmakers on Tuesday that errors were made during the recent credit-market crunch but said they had not been reckless or failed to tell clients of risks."

"'Mistakes were made, there's no question about that,' Gerald Corrigan, managing director and co-chair of risk at Goldman Sachs, told the cross-party parliamentary committee. 'But it's also true that conditions that materialised, especially in the subprime mortgage market, are by any standards quite extraordinary.'"

"The four banks acknowledged that the search for higher yields during a period of low interest rates had boosted the demand for more complex and sophisticated investment products. 'It's inevitable that when markets are strong and booming there's a natural aversion to being the first one into a market and the last one out. That's a fact of life,' Corrigan said."

"Thursday's committee hearing also included the questioning of Northern Rock's auditors, PricewaterhouseCoopers, who said they had not failed in their statutory duty and brushed off criticism over fees received for 'comfort letters' written for Northern Rock ahead of securitisation deals."

"'You've audited and provided comfort to the biggest banking disaster in nearly 150 years,' parliamentarian Michael Fallon told the auditors."

"Florida's pension fund owns more than $1 billion of the same downgraded and defaulted debt that sparked a run on a state investment pool for local governments and led officials to freeze withdrawals, according to documents obtained by Bloomberg News."

"'These were highly inappropriate investments for taxpayers' money,' said Joseph Mason, a finance professor at Drexel University. 'This is the tip of the iceberg for pension funds. We know the paper is sitting there. There are substantial subprime-related losses that haven't shown up yet.'"

"In freezing the pool...the state stopped the clock. The same clock is ticking for every state in the country where school districts and cities and towns put their faith in someone else, usually at the county or state level, to manage their money."

"What's It Worth? Of course, that's the problem with Muniland in general: Nobody ever really knows precisely what's going on when a crisis like this hits. There might be as many as 100 pools like this across the nation, with assets of something like $200 billion."

"For Wall Street, the choices are either...come up with a solution or having one forced on them by regulators, according to former U.S. Securities and Exchange Commission Chairman Arthur Levitt. To regain investor confidence, 'we cannot ignore the need to be transparent at all levels,' he said at an industry conference last month."

"'The market should demand transparency,' said Mark Amberson, who runs the $5 billion Russell Money Fund, and buys asset- backed commercial paper. 'I wouldn't loan my brother money if he hands me a bag and says 'Don't look in there, but trust me, it's really valuable.'"

"Investors and Wall Street firms rely on their own software, models bought ready-made from vendors such as Moody's, and quotes from brokers to value their debt."

"Dan Fuss, vice chairman of Boston-based Loomis Sayles & Co., hasn't found an adequate system to help value CDOs so he refused to include them among the $22 billion of securities he manages."

"'It's like teenagers: You sort of know what's going on but not really,' said Fuss. 'We spent a fortune on software, $75,000 a month. And what do we end up with? A bunch of zip codes.'"

The Associated Press. "Also needed...to prevent a recurrence of today's problems are tighter restrictions on mortgage lending, said Robert Toll, CEO of luxury homebuilder Toll Brothers Inc."

"Toll said home prices 'may not have stopped falling yet,' adding that it may not 'be the best time to buy a home.'"

"Echoing the complaints of consumer advocates who have long pushed for mortgage lending reform, Robert Toll said stronger restraints are needed to prevent a recurrence of today's problems. 'We had mortgages available to the alive and standing and that was the only criteria,' he said. 'There's no reason why we can't set limits.'"

"Toll also said...buyers should take advantage of the opportunity to snap up houses at low prices."

"Problems are starting to show up in loans made to homebuyers with strong credit records because real estate prices continue to slide, added Kerry Killinger, CEO of major lender Washington Mutual Inc., saying he supports the central bank cutting interest rate cuts again as well as temporary expansions of Fannie Mae and Freddie Mac's funding capacity."

"Angelo Mozilo, CEO of Countrywide Financial Corp., said he also backs allowing Fannie and Freddie being allowed to buy bigger home loans and keep more of them on their books as a way to improve liquidity for the battered industry."

"'This is the time for (Fannie and Freddie) to step up to the plate and take action and try to bring liquidity back to the market,' Mozilo said."

"Countrywide Financial Corp CEO Angelo Mozilo said on Monday he doesn't expect the largest U.S. mortgage lender to file for bankruptcy protection, saying the 'elements are certainly not there.'"

"'Countrywide is a strong, viable financial company,' Mozilo said. 'Bankruptcy is an issue that nobody can ever eliminate, although I don't think it's possible or probable for Countrywide.'"

"A national labor union launched a campaign Monday against Countrywide Financial Corp., calling on members and other consumers to boycott the mortgage lender's banking subsidiary until it guarantees it won't foreclose on borrowers who have fallen behind on adjustable rate loans."

"By targeting Countrywide Bank, the labor union hopes to hurt the lender's ability to generate the funds needed to make new home loans. Countrywide began relying on its banking arm to fund loans in the wake of the liquidity crisis that rattled financial markets following the spike in home loan defaults this summer."

"It has been aggressively courting new deposits and expanding its bank branches."

The Northwest Herald. "Dee Biedermann is living in a crowded RV parked next to the neat, taupe-colored house she used to call home. Next week, Biedermann will move out of her neighbor’s driveway and into a rented duplex in Lakemoor, an outcome common for millions of Americans expected to lose their homes through foreclosure this year."

"Biedermann fell behind in mortgage payments as her loan adjusted upward once, twice, a third time – eventually reaching 20 percent higher than her initial rate, she said."

"'I’m living here with the dog, two cats,' Biedermann said. '[My neighbor’s] got the parrot.'"

From MarketWatch. "Housing will revive when prices come down to the point where demand rises enough to reduce the huge supply of unsold homes now overhanging the market. That said, this point is a long way off. Right now, there is at least a 10-month supply of unsold homes at current selling rates."

"To whittle this supply to more normal levels, demand has to rise. That will happen when prices fall, since right now, housing prices are much too high relative to family incomes."

"Today, median home prices are 3.5 times the size of median annual family incomes. This may be down from the recent peak of 4.2 times incomes reached last year, but it's way above the 2.8 times that home prices averaged during 1984-2000, when lots of homes were bought, sold and built."

"And if you think 2.8 is low, check out the early 1970s. That was when home prices were only 2.3 times median family incomes, and housing was selling like gangbusters." "To equal the affordability of the early 1970s, prices would have to fall a whopping 38%."

"Sellers could always hold the line and wait for family incomes to rise. But this clearly won't happen overnight - and, besides, it's a buyer's market and no one wants to buy today knowing that prices might well be lower tomorrow."

"After all, when it comes to housing prices, what matters most is not the cost of construction, nor what surrounding homes might be selling for. Simply put, it's affordability. And until they are more affordable, houses won't sell."