This is REALLY BIG folks:

NEW YORK, July 16 (Reuters) - Mortgage insurer MGIC Investment Corp reported a wider quarterly loss and said it will stop writing new business as losses mount in the battered housing sector, sending its shares down 14 percent in premarket trade.

You basically cannotfinance a home purchase with more than 80% LTV (loan to value) without private mortgage insurance - that is, insurance that covers the lenderif you default and they take a loss.

MGIC (NYSE: MTG) is the largest issuer in this area.  They said they will be "trying" to capitalize a new company to write this business, but their continuing losses - which, by the way, they said they thought they had under control last yearafter repeated flirtations with going under outright - has apparently forced this decision.

There is absolutely no way to read this as anything but an outright disaster for the housing industry. 

We needto force lending back to 80% maximum LTV (20% down payments in CASH) and 36% DTI (debt-to-income) ratios maximum, but the housing industry has continued to rely on and demand access to money on looser (that is, more leveraged) terms.

The problem is that there's no way to do that and turn a profit, as MGIC continues to show.  Between them and PMI, the other "big" player in this space (due to report in August) they provide the backing for these high-LTV loans - backing that is now disappearing.

Let me be clear: this sort of lending needs to go away, but essentially the entire thesis behind those who claim that we're "bottoming" in the recession and the housing market dependson the availability of private mortgage insurance so these loans can be funded, securitized and financed, including but not limited to funding by Fannie and Freddie.

Put a fork in the calls for a bottom to housing folks - we're going back to sustainable lending whether the Realtors Guild and Housing Crooners like it or not.

With the death of the "housing has bottomed" call will come an end to those who claim that the economy has turned.  It may take an hour, a day, a week or a few months before these folks realize they were wrong, but there's no way around the conclusion given this set of facts.