Some housing bubble news from Wall Street and Washington. Reuters, "State Street Corp said on Thursday it will take a $279 million fourth-quarter charge after making bad bets on subprime mortgages and other debt, and said it replaced its investment management chief. The company is the world's largest money manager for institutions, with about $2 trillion of assets under management as of September 30."

"It is also one of the world's largest providers of custody services for institutional investors, overseeing $15.1 trillion of assets."

From Bloomberg. "State Street had $8.2 billion...in securities backed by mortgages made to the riskiest borrowers, down from $13.9 billion as of June 30."

"State Street faces at least three lawsuits filed by clients who accused the firm of breaching its fiduciary responsibilities as a fund manager. Each claims that investment strategies sold as low risk led to substantial losses because of investments in mortgage-backed securities."

Dow Jones Newswires. "State Street set up a $600m reserve to cope with legal and other costs it faces after the credit crisis."

"In October, US life insurer Prudential Retirement Insurance and Annuity Company sued State Street, claiming it acted deceptively and imprudently when two of its bond funds declined by as much as 25% in July and August as a result of investments in mortgage securities."

"National City Corp, one of the 10 largest U.S. banks, said on Wednesday it will cut its common stock dividend 49 percent and eliminate 900 jobs as it stops offering mortgages through brokers."

"'It plans to keep making home loans, emphasizing mortgages considered less likely to go into default, but expects loan volume to fall by more than half in 2008. National City expects to make about $15 billion to $20 billion of mortgage loans in 2008. That compares with about $43.9 billion for the first 11 months of 2007."

"Pressure in the housing market is not going to abate any time soon,' including in 2008, CEO Peter Raskind said in an interview. He said the changes will help the bank 'navigate through a very difficult period for the entire industry, and beyond.'"

"National City is still reeling from the U.S. housing slump a year after selling its subprime mortgage unit to Merrill Lynch & Co. A third of the bank's branches are in Ohio and Michigan, two of the states with the highest foreclosure rates."

"The housing market 'requires aggressive steps to overcome the near-term challenges,' Raskind said in a statement today. 'It is clear that origination volumes will be lower going forward, and we are configuring our mortgage business to operate profitably.'"

The Boston Globe. "Springfield...is one of those investors that got clobbered in its portfolio by owning securities backed by home loans."

"Springfield bought investment securities that had been rated AAA and worth nearly $14 million in the middle of last year. Those same investments have plunged in value to just $1.2 million now. No one thinks they deserve an AAA rating any more."

"In the global financial marketplace, an investor losing $12 million or $13 million during such a wild period doesn't amount to a hill of beans. For a city that has stepped back from financial disaster in just the last few years, it's a very big deal."

"Thanks to aggressive collections and cost-cutting, Springfield has managed to generate surpluses in the last two years. That surplus was about $17 million two years ago and $30 million in the most recent year, so it hurts when $12 million goes up in smoke."

"Springfield purchased CDOs, or collateralized debt obligations, securities backed mainly by mortgages, from Merrill Lynch as a way to put its available cash to work. City officials say Merrill Lynch, an active player in the municipal finance business, sold them securities that cities in Massachusetts aren't legally allowed to own for reasons of safety and liquidity."

"'We take very seriously the financial cost and the breach of public interest,' said Chris Gabrielli, the chairman of Springfield's Finance Control Board. 'Our view is that Merrill Lynch has responsibility here and is accountable. We shouldn't have to settle for less than getting the money back.'"

"The rating agencies, which caused so much of the subprime pain with their indiscriminate blessings, seem to be skating past responsibility."

"Issuance in the U.S. asset-backed market plummeted 30 percent this year as subprime mortgage loan origination declined in a deteriorating housing market and investors fled the risky securities."

"The dollar total of ABS securities fell to $863.6 billion in 2007 from $1.249 trillion sold in 2006, Thomson Financial said on Monday. The overall decline in issuance was led by a sharp 61.9 percent drop in the home equity segment, also referred to as subprime mortgages."

"'2007 will be a year to remember with the subprime mortgage market falling off the cliff, contagion spreading to every market and volatility at all-time highs,' said Deustche Bank in a recent report."

"Commercial paper backed by mortgages, credit-card loans and other assets rose $26.3 billion to a seasonally adjusted $773.8 billion for the week ended Jan. 2, the Federal Reserve in Washington said today."

"'The market's in a process of healing,' said Neal Neilinger, managing director and co-founder at NSM Capital Management LLC. 'The weakest are going to fall and the strongest are going to survive.'"

"The rise in asset-backed commercial paper, which matures in 270 days or less, snapped a retreat of $447.6 billion, or 37 percent, that began after the market reached a peak on Aug. 8 of $1.2 trillion."

"The contraction resulted from a 'disappearance of the 'shadow' banking system that had allowed banks to securitize their mortgage loans and move assets off their balance sheets,' David Rosenberg, chief economist at Merrill Lynch & Co. in New York, said yesterday in a research report."

From Builder Online. "The National Association of Homebuilders is forecasting that the housing market could reach bottom by the second quarter of 2008, with a 'pretty good expansion' occurring once again in 2009."

"David Seiders, NAHB's Chief Economist, sees new home sales bottoming out in the first quarter of 2008. He noted that recent price declines, which he labeled a 'correction process,' are helping to 'revive affordability.'"

The Philadelphia Inquirer. "Orleans Homebuilders Inc. today said it recorded a $55 million pretax charge on the sale of about 1,400 building lots, mostly in Florida, Illinois and Arizona, in nine separate deals for $32 million."

"Most of the land sold in the nine deals was raw or partially developed, with the exception of the property in Arizona, which involved work-in-progress houses. 'We generally sold lots and land in weaker-performing communities,' Jeffrey P. Orleans, the company's CEO said in a news release."

The Washington Post. "The homeownership rate was approaching 70 percent in 2005, up from 64 percent in 1990. A good cause shielded bad practices. (C)omplacency lulled ordinary Americans into paying ever-rising home prices. Something so embedded in the national psyche must be okay."

"By 2005, the average newly built U.S. home measured 2,434 square feet, and there were many that were double, triple or quadruple that."

"'We're not selling shelter," says the president of Toll Brothers, a builder of upscale homes. 'We're selling extreme-ego, look-at-me types of homes.'"

"In 2000, Toll Brothers' most popular home was 3,200 square feet; by 2005, it had grown 50 percent, to 4,800 square feet. 'Buying a bigger house isn't an investment,' warned Wall Street Journal columnist Jonathan Clements. It's 'a lifestyle choice -- and it comes with a brutally large price tag.'"

"Sociologically, the 'housing bubble' resembles the preceding 'tech bubble.' When people paid astronomical prices for profitless dot-com stocks, they doubtlessly reassured themselves that they were investing in the very essence of America -- the pioneering spirit, the ability to harness new technologies."

"Exorbitant home prices inspired a similar logic. How could anyone go wrong buying into the American dream? It was easy."

The Wall Street Journal. "U.S. house prices 'likely would have to fall considerably' to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists."

"The study, which doesn't necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly."

"Starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818."

"The rent/price ratio is about a third below its long-term average...The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade."

"The U.S. study is by Morris Davis, an economist at the University of Wisconsin-Madison and until 2006 a staff economist at the Fed; and Andreas Lehnert and Robert F. Martin, staff economists at the Fed."

"Mr. Davis said...'To justify current price levels, you need rapid growth in rents.' But it's hard to imagine the scenario that would justify such rapid growth in rents, he added. Indeed, it's possible rents will grow more slowly than 4%, reflecting the overhang of unsold homes that might be rented out."

"Mr. Davis said the authors postulated a five-year horizon for the rent/price ratio to return to normal by looking at previous downturns. 'When a downturn begins, it will last for a while.'"