Housing Doom

Maybe the whole state of California isn’t going into default, but it’s starting to feel like it: [Thanks L!]

About 1 in 10 Californians with a home loan is now in default, and there’s growing evidence that the mortgage meltdown is spreading to commercial real estate.

The home mortgage delinquency rate — the percentage of borrowers who have missed several payments and are in the first stage of foreclosure — climbed in June to 9.5% in California and 9.9% in Los Angeles County, according to First American CoreLogic.

The staggering number of home mortgage defaults probably will lead to large numbers of foreclosures through at least this year, housing experts say.

"It’s probably a given we’ll see a high number of foreclosures in the next couple of quarters due to the level of defaults plus the recession and jobs lost. There’s plenty more pain to come," said Andrew LePage, an analyst for real estate research firm MDA DataQuick of San Diego.

The rumblings continue in commercial real estate:

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To those who would claim the First-Time Homebuyer Credit without qualifying for it, beware: [Thanks T.M.!]

WASHINGTON — The Internal Revenue Service today announced its first successful prosecution related to fraud involving the first-time homebuyer credit and warned taxpayers to beware of this type of scheme.

On Thursday July 23, 2009, a Jacksonville, Fla.-tax preparer, James Otto Price III, pled guilty to falsely claiming the first-time homebuyer credit on a client’s federal tax return. Price faces the possibility of up to three years in jail, a fine of as much as $250,000, or both.

To date, the IRS has executed seven search warrants and currently has 24 open criminal investigations in pursuit of potential instances of fraud involving the credit. The agency has a number of sophisticated computer screening tools to quickly identify returns that may contain fraudulent claims for the first-time homebuyer credit.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

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Foreign central bank holdings of Treasury Debt nudged past $2 trillion for the first time ever, but those buyers of US obligations mostly sat on their hands last week. This week’s Reuters report [1] chalked up just a $3.473 billion rise in total holdings, with both numbers improving slightly. The report was, as usual, based on the weekly update from the NY Fed’s H.4.1 table site.[2] Here is Doom’s updated CSV version of the agencies and treasuries foreign central bank holdings data set.[3]

Treasuries rose $4.289 billion, not much better than last week. With massive supply of T-bills coming down the pipe, this doesn’t provide much support.

The drift down in agencies has slowed to a trickle, down just $0.816 billion.  That’s 7 straight weeks of net selling, but in all that time the total has slipped less than $20 billion.

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While the MSM is for the most part pretending that the crisis in real estate is over, we are really only starting to see the bigger problems in commercial real estate- and it sounds like the government is worried:  [Hat tip Freedom's Phoenix]

Last week a story which gained very little traction hit the financial newswires.  The U.S. Treasury is working on an internal project informally called “Plan C” which seeks to deal with further problems in the economy before they occur.  The anonymous report came out stating the administration is reluctant to commit any additional money especially to the level mentioned in the report.  However this is a disturbing new development in our bailout nation since this is one of the first times that the U.S. Treasury will try to preemptively deal with a financial problem.

The issues with this Plan C is that it is setup to be a buffer on further deterioration in various loan categories but the big one is commercial real estate.  The commercial real estate market is gigantic and many of those loans are still active:

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The recent allegations of trade secret theft and trafficking against former Goldman Sachs programmer Sergey Aleynikov raise important questions of corporate security and policy to handle a new generation of attempted economic disruption. According to a deposition given by FBI Agent Michael McSwain, Aleynikov, a former programmer at Goldman Sachs, is purported to have uploaded proprietary trading code from Goldman Sachs’ offices in New York to a server located in Germany. [1] Regardless of the outcome of the Goldman case, such a potential leak has wider implications for the future of corporate and national security. It is doubtful this was a mere prank. Recent history has shown that economic crime is seldom the product of the actions of a lone individual. [1]

I thought it was kind of cute when the radical feminist poet Kate Jennings discovered a Wall Street awash in spooks, but these two guys are getting on my nerves.  Now we’re supposed to believe in EDoS, a new econo-terrorist exploit that involves revealing trade secrets.

like … You rang?

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Have you wondered where the TARP funds have gone?  Here’s one answer: [Hat tip Freedom's Phoenix and Cryptogon]

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We’ve tallked about people being hurt by rising foreclosures and even pets, but there’s another population that’s being hurt by a declining housing market- horses are hurting too. That’s putting a real strain on horse rescue groups.  According to today’s Austin Statesman:

Area horse rescue groups are reporting a growing number of neglected and abandoned horses in Central Texas, a troubling trend fed by the twin ravages of recession and drought.

"It’s frightening," said Jennifer Williams, president of Bluebonnet. "If people have lost their jobs or are having trouble making ends meet, sometimes they are put in an impossible position."

Other horse rescue operations in Texas agree that the situation is becoming dire. "In the last year, we’ve been getting strays on a regular basis," said Melanie DeAeth, president of True Blue Animal Rescue in Brenham. "We’re getting more and more calls from people who are losing their homes and going through foreclosure."

Here’s how this is affecting one rescue group the Bluebonnet Equine Humane Society. (BEHS)

Bluebonnet, which is headquartered in College Station but takes in horses throughout Central Texas, has reached capacity and no longer has room among its various volunteers to place additional horses. The rescue group has taken in 76 horses this year and is on pace to nearly double the 86 horses it rescued last year. True Blue has rescued 32 horses this year, already doubling its total of 16 for 2008.

Many of the horses that end up with rescue groups are the result of seizures by local sheriff’s departments — including several this year in Central Texas — as well as voluntary surrenders by individuals who realize they’ve gotten in over their heads.

I thought I’d put in a shameless plug and disclosure here-

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The other key ingredient to the success of any HFT platform is low network latency. The platforms are greatly helped in this regard by the fact that many exchanges will let HFT platforms pay to co-locate their servers with those of the exchange itself, so that the HFT platform can get its order in ahead of the competition. Critics contend that such co-location deals provide avenues for potential front-running of orders, in which an HFT platform gets an advance peek at an incoming order that will move a stock’s price in a specific direction, and then uses that knowledge to make a quick bet on impending the price move. [1]

That letters-of-fire was from the heavy computer gaming community, and even they are now clued into the critical place CoLo holds in this season’s hot new title — Matrix with Money

UPDATE: Reuters’ Felix Salmon has wrestled the author of the above to the ground and conducted a must-read interview.[4]

FS: If HFT makes $20B a year, whose money is that?

JS: On one level, the answer to this question is easy for most of what goes on under the heading of “HFT”: the money is coming from whoever is buying stocks that are marked up a penny or so because they were down a rung on the speed/latency ladder. This could be pension funds, retail investors, or anyone else in the world. So it’s coming from the market participants.

And then there’s the anonymous Kid Dynamite,[2] the self proclaimed high-end card sharp who recently wrote a screed suggesting that us folk who are a bit less smart and colocated than the HFT traders deserve exactly what we’re getting.  I spent almost an hour at the terminal last night swallowing down bile and nodding my head at the same time.  Oh well, at least this guy [is that his real name?] [3] thinks that someone should strap on a six-gun, ride into Dodge and cool down the temperature at the OK Corral so that the retail investors can start considering sticking their heads out from their storm basements.

Meanwhile, I’m becoming a bit less worried about flash orders.  Could it be that story’s a diversion?  Just watch Larry Leibowitz, NYSE Euronext group executive VP in charge of U.S. Markets and Global Technology from about 3:30 in the embedded video. Look his eyes, and then his mouth. It’s the public inspecting their colocation practices [UPDATE: check out yesterday's "Upward Trend in Per-Cabinet Colo Revenue"] that has him worried.  Fear’s a leading indicator.  Maybe CoLo’s where we should be applying our curiosity.

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Housing Doom Word 4 the Day: ingenuous

Reuters this morning.[1]

A Goldman spokesman just emailed me a quick statement, trying to downplay the firm’s involvement in HFT. The spokesman notes that “even using the broadest definition, high frequency shares trading accounted for less than 1% of Goldman Sachs’ total revenue in the first half of 2009.”

The spokesman goes on to note that Goldman’s proprietary trading HFT desk does not receive so-called “flash quotes” from stock exchanges. A flash quote is a controversial practice in which an exchange allows some hyperactive HFT desks to get a sneak peak of other customers orders.

Reuters this afternoon.[2]

Direct Edge, which aims to become a formal exchange operator later in 2009, has more than tripled its market share in the last year, thanks in large part to its flash program, called the Enhanced Liquidity Provider, or ELP.
…

Direct Edge is owned by Goldman Sachs (GS.N), JPMorgan Chase & Co (JPM.N), hedge fund Citadel, Knight Capital Group (NITE.O), and the International Securities Exchange, a unit of Deutsche Boerse’s (DB1Gn.DE) Eurex exchange.

I don’t think Matt is going to be a happy camper …

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But the impact of the change is much larger. It makes some homeowners in foreclosure liable for the difference between their mortgage and what their lender can recoup from reselling the house. In the current housing market, the difference is generally more than $100,000 on the typical Valley foreclosure. [1]

Twist and I have made something like a career out of harassing the Arizona real estate industry and the Arizona Republic’s Catherine Reagor in particular, but I don’t see too much separation between us on this one. [Update 7/27: however, see comment #4 below -- thanks again to Ms Reagor for breaking a story that was threatening to fall through the cracks]

Doom readers will know my opinion that American lawmakers shouldn’t touch recourse mortgages with a barge pole, but it looks like the Arizona Legislature wants to dive right in.

Guys, they tried this in Old Testament times.  It didn’t work then, and it won’t work now.

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