Some housing bubble news from Wall Street and Washington. Reuters, "Corporate America is pouring money into the U.S. presidential campaign at an unprecedented rate, with a torrent of donations coming from the businesses behind the subprime mortgage crisis. Facing a government crackdown over predatory lending and a troubled housing finance system, Wall Street and the real estate industry were among the top political givers in 2007, a campaign finance watchdog group said on Sunday."

"Leading all corporate donors in campaign donations as of the end of last year was investment banking giant Goldman Sachs, based on an analysis of Federal Election Commission records, the Center for Responsive Politics said."

"The next four largest corporate donors were Citigroup, Morgan Stanley, Lehman Brothers and Merrill Lynch, according to the center's fourth-quarter preliminary analysis, which is subject to revision."

"Senators Clinton and Obama have each taken in more than $5 million from securities and investment firms; Republican Mitt Romney, over $4 million, and rival John McCain, $2 million."

"Real estate has not been far behind, donating $4.8 million to New York's Clinton and $3.7 million to Romney, the former governor of Massachusetts."

"Illinois' Obama has raked in $2.7 million, and Arizona Sen. McCain $1.9 million from real estate interests including mortgage brokers, homebuilders and property developers."

The San Francisco Chronicle. "Congress is set to rush through an increase in the mortgage loan limits for Fannie Mae and Freddie Mac (and Federal Housing Administration insurance, too) - from $417,000 to $729,750."

"Those same lawmakers won't mention the fact that they get paid far more by real estate lobbyists than they do from our Treasury."

"I've spoken with borrowers who stopped making mortgage payments seven or more months ago. None has received a default notice. Defaults may be much higher than banks are letting on. The data lags are growing suspiciously long. Nobody knows what's going on. Seven months without making a single payment!"

"Will Fannie guarantee those loans because they aren't in formal default yet? Nobody wants to know, because if they know, they might be called to testify next year. That's why lawmakers want to raise the limits now and ask questions later."

"In support of the economic stimulus bill, Bush will have to face 'working American families' and explain that some of their tax money is going to be spent guaranteeing $730,000 mortgages on $1 million homes. It's like some sort of upside-down communism where the poor pay the rich welfare."

"Why should taxes from families earning $48,000 a year be used to support expensive mortgages in New York, Los Angeles and San Francisco? Welfare for the hungry and homeless is evil, but welfare for million-dollar homeowners facing a tough refi ... well, that's called 'helping the economy.'"

"I can imagine the president's radio address playing in the heartland: 'We have some families with million-dollar homes on the coasts who are really hurting and so we need you, the working families of America, to stand together with them and help them avoid the kind of home price depreciation that might leave them without a new Lexus for years.'"

The Ventura County Star. "For the past few months, America's subprime mortgage drama has dominated the news, but its threat to the overall economy puzzles some people."

"If mortgage providers unwisely extended credit to unqualified borrowers, they must refinance or repossess the properties, as they have in the past. Why on earth would this situation threaten the world economy?"

"Banks package their loans into financial products like Collateralized Debt Obligationss, selling as investments the cash flow and interest profits from the mortgages. Theoretically, this dilutes default risk through diversification; many different types of loans are mixed together."

"How does such an instrument end up achieving the exact opposite of its intended outcome?"

"Our knee-jerk response is to quote Berkshire Hathaway Vice Chairman Charlie Munger: 'When you mix raisins with turds, you've still got turds.' But bad loans are just bad loans, even if banks make more bad loans than usual."

"Knowing that subprime mortgages were pigs, bankers applied enough lipstick and rouge to make the loans attractive to investors. But the banks made these packages so attractive that they bought them from each other. CDOs were invented so banks could transfer risk and earn fees in the process, but when banks started issuing multiple CDOs based on the same securities and buying them from each other, things got out of hand."

"Those watching the subprime debacle and waiting for 'the other shoe to drop' are in for an unpleasant surprise: it will soon be raining shoes."

From Business Week. "We've been reading a lot lately about how subprime mortgages have submarined the economy. But, while there's no denying the subprime problem, on closer look it's clear that even prime borrowers were taking on more debt than they could afford."

"How bad is it? In Arizona, between the third quarters of 2006 and 2007, there was a 902% rise in foreclosures started against homeowners who had prime adjustable-rate mortgages, known as ARMs, according to the Mortgage Bankers Assn."

"ARMs, whether prime or subprime, are the real culprit in the housing crisis because they've allowed too many people to buy homes with almost no money down, with the hope that they could flip the properties or have rates drop before the loans reset."

"The rise in prime ARM foreclosure starts isn't isolated to a few states. Nationally, foreclosure starts related to prime ARMs jumped 253% in the third quarter of 2007 when compared to a year earlier."

"'The fact is the pain of the changing real estate markets is affecting more than just subprime borrowers,' says Keith Gumbinger, VP of a financial information publisher. 'It's more important to think of it as perhaps an ARM problem and a rate reset problem, not just a subprime problem.'"

"Arizona, Florida, Nevada, and California, which all had the greatest rise in prime ARM foreclosure starts in the third quarter of 2007, also have a heavy concentration of investor-owned properties."

"Maryland prime ARM foreclosure starts increased 229% during the 12 months ending in the third quarter, 2007. Virginia, which like Maryland includes high-priced Washington, D.C., suburbs, had a 369% year-over-year increase."

"Oregon, Massachusetts, and New Jersey also saw huge jumps in such foreclosure starts, in part because buyers with good credit in those states used ARMs to pay for homes that might otherwise have been out of their reach."

"Of course, nobody would be complaining about ARMs if home prices were still rising."

"'There was so much competition for mortgages over the last couple years that the definition of prime became less and less stringent,' says Addison Wiggin, publisher of Agora Financial, which publishes investment advice for individuals. 'Even in the prime market, you had people taking on larger loans than they historically were able to handle.'"

"One type of mortgage that was popular with prime borrowers during the boom was the so-called option ARM. As a result, with unpaid interest accumulating and house prices falling, some homeowners have seen the equity in their homes disappear and even head into negative territory."

"Jay Brinkmann, the Mortgage Bankers Assn.'s VP for research, says the slumping home prices simply uncovered problems that borrowers could sidestep in the days of home buyer bidding wars and double-digit annual price increases."

"'Before, if somebody had a divorce or the main wage earner was injured and couldn't work, or some other issue, you would not have seen it because they would have sold their house and satisfied their mortgage, 'Brinkmann says. 'Now if there's still the same level of job loss, more of those people end up in foreclosure because they can't sell.'"

"'The magnitude of the [prime ARM foreclosure start rate] increase is somewhat large because we had a lot of activity in the last few years,' says Robert Kleinhenz, deputy chief economist with the California Association of Realtors. 'We thought the prime side of the market would be a steadying influence and what we had to focus on is the subprime market. That's not exactly true as the events are unfolding.'"

"Mortgage bankers, industry experts and nonprofit officials say that the impact of the Option ARM, involving hundreds of billions of dollars of loans, has yet to be felt. And, they say, it will hit prime borrowers and subprime borrowers alike."

"People like Bruce Rose who never should have got a loan. Rose bought his home in Boston in 1986. After stress and depression forced him to retire as a state employee in April 2006 he 'maxed out' his credit cards on his annual income of around $16,000."

"On medication, he refinanced his debts through the largest U.S. mortgage lender, Countrywide Financial Corp. The new loan totaled $439,000. Rose said he did not know his mortgage broker and Countrywide used a stated income loan, also called a ,liar loan, because no proof of income is required, and that they claimed his monthly income was $12,166."

"'If I had known what I was signing I would never have agreed to the loan,' he said. 'Now I may lose my home.'" "Rose's minimum payment rose from $1,200 a month to $2,800 and his loan now totals more than $500,000. He is fighting foreclosure."

"'No reasonable lender would have given him a loan like that,' said Virginia Pratt, a foreclosure prevention counselor at a Boston nonprofit group, who is seeking legal counsel for Rose."

"Rose's is an extreme case, but industry insiders say Option ARMs, also called Payment Option ARMs, will be the next chapter in the U.S. housing crisis and could push hundreds of thousands more subprime and prime borrowers into foreclosure."

"'So far the public is largely unaware Option ARMs are going to cause problems,' said Scott Stern, CEO of Lenders One Mortgage Cooperative, whose 100 members originate $40 billion in mortgages annually. 'But mortgage servicers know what's looming in the pipeline.'"

"Option ARMs have existed since the 1980s, but according to a U.S. Federal Deposit Insurance Corporation report, as recently as 2002 they were still quite rare."

"Industry insiders say a skewed system...paid mortgage brokers more to sell Option ARMs than traditional loans. 'If you're a broker and you can get $4,000 commission for a traditional loan and $12,000 commission for an Option ARM, which one are you going to pick?' said Michael Lefevre, CEO of trade group the National Association of Mortgage Professionals."

"'This product is suitable for people with a lot of money who are financially astute,' said David Zugheri, president of First Houston Mortgage, which offers loans in 18 U.S. states. 'But very few people fit that category and that's why we didn't make many of these loans.'"

The Star Telegram. "In the past few months, as elected officials and regulators examine the meltdown in housing, more are focusing on appraisals. These independent assessments of a home's value are required for every mortgage, and they set the parameters on a loan."

"Lawsuits have been filed recently against major lenders, alleging that they pressured appraisers to trump up home values so borrowers could get bigger loans."

"And appraisers are accusing lenders, home builders, mortgage brokers and real estate agents, the major parties who rake in most of the fee income, of threatening to blacklist them if they don't play ball."

"'No place has been immune to inflating the numbers, and bad appraisals lead to bad loans,' said John Brenan, director of research and technical issues for The Appraisal Foundation, an organization authorized by Congress to set standards and qualifications for the industry."

"Appraisers have always felt some pressure to deliver the magic number, the appraised value that enables a loan to be made and a home to be sold. But long ago, appraisers worked on staff for a bank or lender, and Brenan says their primary job was to make sure that the bank wasn't saddled with a bad loan."

"Today, most of the work is done by independent appraisers, who are usually paid $275 to $400 for each appraisal. And they're often hired by mortgage brokers, the independent middlemen who bring together homebuyers and lenders."

"Brokers don't just gravitate to appraisers who happen to provide higher numbers; they often seek them out."

"Techniques used to be fairly subtle: a broker would say that an appraisal had to hit a set value and if that wasn't going to happen, the appraiser shouldn't do the work. More recently, some brokers have sent out mass e-mails, asking which appraisers would OK the price."

"'I have an e-mail that went to 200 appraisers,' said Pamela Crowley, who has been in real estate since 1970 and has been an appraiser since 1995."

"She even tells stories of appraisals being altered, with higher values inserted, after the appraiser has turned in the report. Such allegations help explain why investors remain so skittish about the housing problem -- it's hard to tell just how far the market may fall."

"In an industry survey last year by October Research, a stunning 90 percent of appraisers said they were being pressured to inflate values, up from 55 percent in 2003. Three in four respondents also said they faced negative ramifications if they didn't deliver."

"More than 10,000 appraisers have signed an online petition, urging the federal government to step in and stop the abuses that they say are corrupting the system."

"'A lot of people have money riding on this, and if a deal falls through, there's hell to pay,' said Harry Davis, who's in Austin and has been an appraiser for more than 30 years."

"He says that real estate agents are the root of the problem. Brenan points to mortgage brokers, because their numbers grew rapidly and they became a primary source of business. Others say that lenders hold the most responsibility."

"Big finance companies are key players, too, because loans are bundled into investments sold around the world, with the blessing of credit-rating agencies."

"The bottom line is that all these parties get paid, and paid well, only if the loan closes. If it goes bad a few years later, well, that's someone else's problem."

"Now that the house of cards is crumbling, the excesses are coming to light. 'Appraisers are supposed to provide the checks and balances in the system,' said Brenan of The Appraisal Foundation in Washington. 'But the housing market was going crazy. It was party time.'"

The New York Times. "Is it finally time to believe in the housing bubble? And how much should the average American care?"

"Barbara Corcoran, real estate maven: 'There’s a hell of a lot of noise out there right now that would scare anyone away from buying real estate. Not me. I’m yahoo-ing, low-bidding, and snatching up deals wherever I can find them.'"

"So until everyone else decides (always at the exact same moment in time) that the worst is over and it’s safe to invest, I’m grabbing as many over-priced, over-stuffed, and over-rated homes as I can get my greedy little hands on.'"

"Lawrence Yun, chief economist of the National Association of Realtors: 'All real estate is local, and there are many local variations. As to the bubble, quite a number of local markets have not seen any price decline. The 'correction' has been in home sales, mortgage lending, and new home construction, all of which are all down significantly."

''Some bad lenders have gone bankrupt, and aggressive hedge funds are hurting as a result — and I, for one, do not care. What I do monitor carefully is a factor that matters to consumers and homeowners: home prices.'"

"'The national median price was 1.1% lower in the second quarter of 2007 than its comparable period the year before. That drop comes after a more than 50% rise in home values during the boom. If people want to call the 1% price decline a bubble collapse, well, everyone has an opinion.'"

"David Lereah, the N.A.R.’s former chief economist: 'Bubble is the wrong imagery for today’s housing markets. Bubbles inevitably 'pop.' A more useful image for the housing markets is a balloon. Balloons expand and deflate."

"'It is clear that air has come out of a number of local balloons across the nation, particularly in California, Nevada, Arizona, Florida and some selected metropolitan areas in the Midwest and Northeast regions.'"

"'From a home sales perspective, the magnitude of today’s real estate downturn is not meaningfully different from our two most recent real estate downturns — 1990/91 and 1980/81...However, unlike real estate recessions in the past, today’s downturn offers two unfortunate residuals — a drop in home prices for the nation as a whole, and a serious run-up in foreclosures.'"

"'If a national bubble had burst, the nation would have experienced a meaningful double-digit drop in home prices. To date, we are experiencing maybe a 3 to 4% drop, at most. But for some post-boom metros like Las Vegas, Miami, and Phoenix, double digit price drops are not out of the question. So the answer is that there have been some local housing balloons that have popped, but no national balloons.'"