WASHINGTON (MarketWatch) — “Sales of U.S. existing homes fell 0.8% in December to a seasonally adjusted annual rate of 6.22 million, a national real estate group reported Thursday. Sales in December were down 7.9% compared with December 2005. Inventories of unsold homes fell 7.9% to 3.51 million, representing a 6.8-month supply, the National Association of Realtors said in the report. `It appears we have established a bottom,’ said David Lereah, chief economist for the NAR.”

No, David. We have established an ass, though.

“La Jolla, CA.——The number of mortgage default notices filed against California homeowners jumped last quarter to the highest level in more than eight years, a real estate information service reported.

Lending institutions sent homeowners 37,273 default notices during the October-to-December period. That was up by 36.9 percent from 27,218 the previous quarter, and up 145.3 percent from 15,196 for fourth-quarter 2005″, according to DataQuick Information Systems.

The sea is drawing back quickly as the tsunami comes. Right now it is just a thin line on the horizon. But it is moving fast. It is driven by:

• Fraud - “liar’s loans”, the “cashback” fraud, appraisal fraud and doubtless many more.
• Time bombs - pay-option loans reaching their negative amortization limits, interest rate adjustments, etc.
• Speculation - according to the NAHB, half of the units on the market are vacant. Too many seats, not enough butts.
• Rates - interest rates are rising, making it harder for new buyers.

Stand back from the beach.

The Arizona Republic has a piece on mortgage fraud. My suspicion is that this “wave” of fraud is much larger than anyone realizes at this point. The article has a good description of the standard fraud and how it works.

“A wave of mortgage fraud is rippling through pockets of the Valley, inflating home values through scams called cash-back deals.

Left unchecked, cash-back deals cost homeowners and lenders millions of dollars and could erode confidence and values in Arizona’s real estate market.

The fraud involves obtaining a mortgage for more than a home is worth and pocketing the extra money in cash. Neighbors may then discover home values in the area are exaggerated. Homeowners stuck with overpriced mortgages may never recover the difference. And lenders end up with bad loans that, in the long run, could hurt the Arizona real estate market, the largest segment of the state economy.

While the extent of the fraud is unclear, an Arizona Republic investigation into these cash-back deals found organized groups of speculators have bought multiple homes this way, leaving whole neighborhoods with inflated values. Add to these the individual deals done by amateurs who hear others talk about the easy money they made from cash-back sales.”

Somehow due to the holiday I missed this cogent comment from John Hussman. But Ovoboby? Whatever.

“Jan. 17 (Bloomberg) — The third-poorest city in Pennsylvania is a lot poorer because of a 28-year bet on interest rates that already has gone awry.

The Reading, Pennsylvania, school district, which has 18,323 students, this week must pay $230,000 to Deutsche Bank AG, Germany’s largest bank, because it’s on the losing side of a wager that long-term interest rates will rise faster than short- term interest rates. In April, the board rushed approval of the so-called interest rate swap in eight days after its adviser said the transaction may earn the district $16 million by 2034.”

When I read stuff like this, it just makes me angry. I’m not sure whether I should be angrier at the crooks - pathetic investment bankers, stealing from the naive, or the idiots - elected dummies who seem to think the investment bankers are their friends. I guess that I come down on the side of the bankers being the worst. I can just see them laughing and high-fiving on their way back to the office after the school board meeting. The school board at least had good intentions.

“Local governments from Augusta, Georgia, to Oakland, California, are being lured by similar opportunities to speculate with derivatives created by the world’s biggest banks. Most of the $400 billion of private agreements sold to municipalities escape taxpayers’ notice and are little understood by the public officials and administrators who approve them.”