Terror in the mortgage pools, by gimleteye

On Sunday, The Miami Herald reported on the latest auction of home foreclosures at the Miami-Dade County Clerk Office. One can easily imagine the same scenario being played out a thousand times across the nation on hot, lazy days where sleepiness is kept at bay by massive inputs of air conditioning and caffeine.

The Herald reports, “The amount of foreclosed real estate owned by Florida-based banks and thrifts has nearly tripled since the fall of last year, when foreclosure rates began their upward trek -- to $94 million as of March 31, from $34 million Sept. 30, according to the most recent Federal Deposit Insurance Corp. data. (These data do not include giants like Bank of America, which have large operations here but are based elsewhere.)

The Florida numbers are much worse than the national average, Miami banking analyst Ken Thomas said. Total real estate owned by banks and thrifts rose 37 percent in the first quarter, compared to 12 percent nationally, he said.

''It appears things will likely get worse before they get better,'' Thomas said.

At Thursday's auction, of roughly 70 properties offered for sale, investors bought only two. A handful were scratched. The rest were bought back by lawyers for various lenders.”

Nothing is happening in the most over-heated real estate markets around the nation, like South Florida’s.

A few weeks ago, The Palm Beach Post reported, “… in Delray Beach, developer Bill Morris is working hard to make sales at his Worthing Place, a 217-unit condo in the heart of Delray's festive downtown. Prices start at $350,000 per unit. Morris says he has plenty of buyer interest, thanks to several incentives. He's offering to pay two years of maintenance, plus a "fly and buy" program to bring qualified buyers in from out of town."

In South Florida real estate circles, a qualified buyer either has very fat wallet filled with dollars or a slim one filled with Euros.

Still, according to the Post, Mr. Morris' prospects are reluctant to sign on the dotted line. "Buyers are worried that if they buy today, the market will decline tomorrow. "No matter what we do, they say, 'Call me in November,'" Morris said.”

Judging from the lethargy of Miami real estate markets, nothing is happening in November aside from the silent click as billions in adjustable rate mortgages reset to higher rates.

Beneath the doldrums of summer, there is an inkling of worse around the corner. Condo and home buyers will not be flooding into housing markets any time soon or at anywhere near the volume to reduce the inventory of unsold residential property.

It is hard summer for US consumers, battered by gasoline prices and falling house values. A puckering feeling, all around.

The massive problems in subprime mortgages has to be unnerving for mortgage bankers at the root of a Decision Tree whose upper branches contain the exotic fruit of a poor homeowner’s misery.

The distressed, former homeowner is now in a rental, his or her credit rating excoriated, or staying with family or moved to a new town.

The banker has no idea what to do. Selling foreclosed properties at fire sale prices into weak and falling markets can't be helpful to the performance bonus.

But there are bigger dilemmas. It is one thing for mortgage inventories to swell on a balance sheet, another thing entirely to sell them off at a loss.

And, still, a bigger problem—the one you don’t read about in the newspapers—every dollar of mortgage value has spawned ten or twenty times the value (really, no one knows!) in derivative financial instruments that are used to leverage more financial assets on someone else’s balance sheet.

Typically, that someone else is a pension fund or provide required to book assets as “investment grade” and not the toxic waste that jumps out at you in a foreclosure sale in a fluorescent, over-lit conference room where everyone is fighting off yawns induced by taxing heat and uncertain prospects.

In 1998, a hedge fund LTCM needed to be hastily bailed out, to the tune of $3.65 billion by investment banks hastily convened to protect against a collapse in bond markets.

There is no final price tag, on the amount of equity Bear Stearns will have to commit, to get out of dodge in two funds sunk by collapsing subprime mortgage values. So far, the smaller of the two funds will require $3.2 billion. Is Bear Stearns, alone in its distress?

Last week, executives at the nation's leading investment banks claimed that the subprime mess is "contained". It sounded a lot, to me, like "Mission Accomplished".

The lenders at foreclosure auctions like the one the other day at the Office of the Clerk in Miami-Dade County don’t show their faces: that is what they hire lawyers for.

But I am wondering how long before the reality of sinking house values requires lenders to sell-off inventory at fire sale prices and what, then, happens to hundreds of billions of financial derivates that have been created from thin air.

Those derivatives are held by financial institutions that provide for the income of millions of ordinary Americans.

So as the fans circle lazily above a desultory and dejected crowd of mortgage lenders, their representatives, and bargain basement buyers in Miami, do the wizards of Wall Street, whose bonus pay packages set them far above quotidian concerns, do the members of the board of the Federal Reserve, or members of Congress, or does the White House have any idea how to avert a collapse, other than to deny inflation while stirring it higher, to whittle down the scale of liabilities from terror in the mortgage pools?

(Read more perspectives at eyeonmiami, the blog. For a coherent analysis of financial derivatives: read Paul Tustain, BullionVault, “Investment landfill, how professionals dump their toxic waste on you” )