There's good news and bad news about the mortgage market. The good news is that you can get your information from a variety of sources. The bad news? You really need to get your news from a variety of sources.

Conflicting reports Wednesday suggest that mortgage applications are up -- and down.

Deutsche Bank (NYSE: DB) expects almost half of all U.S. homeowners to be underwater -- figuratively, of course -- by 2011.

Declines in home prices and the fact that some of those difficult mortgages just aren't going away put 26% of homeowners in this situation by the end of last March, and it seems the situation is only going to get worse. Unlike the early stages of the credit crisis, which were driven by subprime mortgages, the next iteration will have a greater effect on prime mortgage borrowers, which comprise two-thirds of the loans outstanding.

Are mortgage rates affecting U.S. mortgage applications? The short answer most likely is yes. Mortgage applications tumbled to a 7 month low, with refinancing loans down 30%, according to Reuters. This is clearly not a good sign for the housing market.

Kenneth Rosen from the University of California says that mortgage rates are just one factor causing the drop. He adds that high unemployment, concerns for job security, and problems with buyers being unable to sell their existing homes are also affecting the market.

As soon as Washington Mutual (NYSE: WM) evaporated, the natural question was: "Who's next?" And after its stock plunged 38% during the day, it now looks like the next one to go will be Wachovia (NYSE: WB). This time the buyer could be Citigroup (NYSE: C),

With $120 billion in adjustable rate mortgages (ARMs) it got through its Golden West Financial acquisition, Wachovia is particularly vulnerable to the capital-eroding impact of a drop in their value. But if Citi bought Wachovia, it would get a stronger presence on the East Coast and its well-regarded retail banking management.

Citi is not the only firm to talk merger with Wachovia -- prior to its decision to turn itself into a bank holding company (BHC) on Sunday, Morgan Stanley (NYSE: MS) was in merger discussions with Wachovia. I just wonder how any deal could be struck with Wachovia that would not involve those nasty ARMs. And if those ARMs are involved in a deal, how can the acquirer avoid those nasty digestion problems that have sent Wachovia shares into a dive.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup stock and has no financial interest in the other securities mentioned.

Home foreclosure rose 68% in the past 12 months, but declined 10% in November from the previous month, according to date compiled by RealtyTrac, Reuters reported.

Lenders filed 201,950 foreclosure filings in November, for a foreclosure rate of 1 in 617 households.. October's decline follows 2% gains in October 2007 and September 2007, respectively, according to RealtyTrac, Reuters said. The 201,950 foreclosure filed in November 2007 contrasts with 120,334 filed in November 2006, Realty Trac said, The Associated Press reported.

Economist David H. Wang told BloggingStocks Wednesday that investors should not take away from October's monthly decline that foreclosures are trending downward, or that the housing slump is nearing an end.

"It's always good to see a decline in foreclosures, but keep in mind that this is only one month. The market would need to see declines for 3, 4, 5 months before we can begin to state that foreclosures are heading lower," Wang said. "More than likely, with many more resets ahead, the foreclosure statistic is likely to rise."

You have to love academia. With the subprime meltdown in full swing and Americans with ARM and/or pay-option mortgages finding their homes in jeopardy, Tomasz Piskorski of Columbia Business School and Alexei Tchistyi of New York University's Stern School of Business have come out with a 65-page paper full of equations to demonstrate that no, actually these so-called toxic mortgages are the best ones out there.

The authors of the study argue that, in a perfect world, these mortgages are great -- sounds a little bit like what some people say about communism. Pay-option ARMs work great if people behave rationally -- act in the own best interests, behave with self-discipline, and pay more than the minimum whenever possible.

That sounds like most of the subprime borrowers you know? Yeah, that's what I thought. The professors say that, with proper education, these loans could be attractive. According to Piskorski:

"Obviously people are to some extent irrational. But if you want to ban this type of contract, you should really weigh the benefits and the costs. How much could you educate people? Make people understand them. Provide them with software. Make a federal law that requires the lender to reveal what this contract is about."

But most people know shockingly little about finances. According to a Jump$tart survey, "Only 14.2% [of high school students] felt stocks are likely to have higher average returns than savings bonds, savings accounts, and checking accounts over the next 18 years in spite of the fact that there has never been an 18 years period when this was not true."

So educating people about pay-option ARMs seems a little ambitious.

BusinessWeek reports that The Bear Stearns Company's (NYSE: BSC) $642 million High-Grade Structured Credit Strategies Enhanced Leverage Fund is not letting investors get their money out.

Why not? Well for one thing, the fund has lost 23% of its value this year. And another problem is that the fund has borrowed money -- three dollars for every dollar's worth of Collateralized Debt Obligation (CDO) -- to bet on an increase in the value of subprime mortgage-backed CDOs. (As I've posted, this is not necessarily a great bet.) So it lacks the funds to pay back those frustrated investors.

Too bad this Bear mauling is not limited to the investors in this fund. With interest rates rising, a trillion dollars worth of adjustable rate mortgage borrowers will be required to pay more over the next five years. And since these borrowers could not afford a conventional mortgage, many are likely to default. With foreclosures up 90%, this means more properties will be thrown on the market.

Housing prices will continue to decline and more subprime investors will be burned -- as will the banks like Bear Stearns which profited so handsomely from packaging these subprime mortgages into CDOs.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.