This is a fascinating story -- a behind-the-scenes scenario that is the stuff of conspiracies.

During the housing bubble, a huge number of questionable mortgages were created in what is called the subprime market. Many of the home buyers had shaky credit and, eventually, fell into foreclosure. Goldman Sachs (GS) held some of these securities but wanted protection against default. Where do you buy such insurance? American International Group (AIG), of course.

Under the terms of the insurance, Goldman was entitled to collect payments if the securities fell below certain agreed-upon values. You guessed it. When the housing bubble started to burst, Goldman demanded $2 billion from AIG to cover its losses.

Almost lost among the in-line 1% December rise in pending homes sales, as compiled by the National Association of Realtors, was an observation by NAR Chief Economist Lawence Yun.

Yun said he expects existing home sales to rise to 5.6 million in 2010, up 8.5% from 5.16 million in 2009, aided by the the extended home buyer tax credit. Yun also sees 2.4 million households taking advantage of the home buyer credit in 2010.

The optimism on Wall Street about housing is surreal given all the public data on housing values, mortgage defaults, foreclosures and new home starts.

Housing prices are going to fall nationally for another couple of years as foreclosures hit 6-7 million in the next 30 months, and the 600,00 to 800,000 homes foreclosed but not yet listed are added to housing inventory. The headwinds created by this will last until foreclosures peak and those homes hit the market in late 2011 to mid-2012. Foreclosures will not hit historical norms until a year or two from that peak.

I love my country: the chaos, the hurly-burly of democracy, the hard work of quiet people and the great, big heart as shown by our private donations to Haiti at a time of near 20% unemployment and underemployment. We forgive wayward politicians and athletes, let our children make more decisions than virtually any people on Earth and we stand for something -- a true city on a hill. But right now, that city is in political chaos ... and pretty broke.

Although, I don't like to say it, it is time to short the United States.

U.S. stock market futures were higher Wednesday morning as upbeat earnings report from late Tuesday and early Wednesday boosted sentiment. Meanwhile, investors also awaited the Federal Open Market Committee policy statement later in the day as well as President Barack Obama state of the union address.

As Fed chairman Bernanke fights for another term at the helm of the federal bank, the Federal Reserve may take a chance the housing market can stage a comeback without its support and announce today it will stick to the plan to end a $1.25 trillion program of mortgage-debt purchases in March. The Fed will release its policy statement at 2:15 p.m. Eastern.

Home prices fell yet again in November, losing 0.2% month-over-month (on a not seasonally adjusted basis), following a 0.1% drop in October. The Standard & Poor's/Case-Shiller's home price index reported only five out of 20 metro areas with gains, and from November 2008 to November 2009, home prices are off 5.3%. Need a benchmark? It's late 2003: Six years of appreciation have been obliterated by the financial crisis.

The slide worries analysts who wonder if the housing recovery is strong enough to keep moving forward. A stall on the housing side, of course, could push through the rest of the economy, ultimately putting the squeeze on consumer spending (further) and impeding overall growth.

U.S. stock futures declined Tuesday morning as global growth concerns hit markets following S&P downgrade of Japan's outlook and reports of further tightening in China that could hamper growth. Meanwhile, in the U.S., the Federal Reserve begins its two-day policy meeting on Tuesday, amid several economic indicators due out.

U.S. stocks rose Monday as bargain hunters jumped in. But trading was light as Wall Street awaited news from later in the week regarding the confirmation of Federal Reserve Chairman Ben Bernanke, the State of the Union address and bank regulatory developments. Meanwhile, the earnings season continues to give mixed results, not fully convincing investors a recovery is underway.

Sales of existing homes plunged 17% in December, the sharpest drop since records began in 1968. The sales pace fell to 5.45 million annual rate from 6.54 pace the previous month.

Part of the reason for the drop was attributed to the termination of the first $8,000 tax credit for first time buyers. That kept buyers away from the market. Since then Congress has extended the tax credit. Realtors expect a pick up in sales going into the Spring season.

Chairman of the House Financial Services Committee Barney Frank said Friday at a hearing on executive compensation issues: "I believe this committee will be recommending abolishing Fannie Mae and Freddie Mac in their current form and coming up with a whole new system of housing finance."

This represents a turnaround for Representative Frank (D., Mass.), who has been a staunch supporter of Fannie Mae and Freddie Mac.

The Commerce Department reported this morning that U.S. housing starts fell 4% in December, bringing the seasonally adjusted annual rate to 557,000. For all of 2009, roughly 554,000 homes were started, which is 39% lower than the total from a year earlier. Furthermore, this reading is the lowest since the end of World War II.

Starts of single-family homes fell 29% to a record low of 444,000 in 2009. The good news? This reading was a good deal better than the 540,000 rate expected by analysts and November's starts were revised higher.

The first-time homebuyer's credit -- of up to $8,000 -- has certainly been popular. And, it's given a much-needed boost to the lagging real estate market.

But according to a report from the Treasury Inspector General last year, the program has seen plenty of dubious activity. In fact, there are now more than 107,000 civil cases in progress (even a four-year old claimed a credit!).

Foreclosure filings spiked in December. The 14% increase from the previous month made the first monthly increase since July -- and a hell of a severe way to break the streak. The double-digit increase, reported by RealtyTrac, brought the number of foreclosures to 349,519 in December. In addition to the increase from November, the result is a year-over-year increase of 15% from December 2008. In 2009, 2.8 million foreclosures were filed, up 21% from 2008 and 120% from 2007.

Foreclosure activity reached a monthly high of 361,000 in July, but loan modifications, state legislation extending the foreclosure process and the volume of homes in the foreclosure pipeline had resulted in a gradual decline from that point. From the third quarter to the fourth, foreclosures fell 7%, though the rate was still up 18% from the fourth quarter of 2008. California posted a 17% decline in foreclosures quarter-over-quarter, though it increased 9% from November to December.

The Fed's Beige Book summarizes economic activity compiled from data obtained from the 12 Federal Reserve districts.

Here are some notes from the Beige Book:

• Most districts reported that consumer spending was up a bit during the recent holiday season, but still below the 2007 level.
• Retailers in Philadelphia and San Francisco noted small gains, but they didn't amount
• to much.

Shares of Lennar Corp. (LEN) surged Thursday after the Miami-based homebuilder reported a surprise profit for the fourth-quarter of 2009, its first in two years.

For the three months that ended in November, Lennar posted earnings of $0.19 per share, compared with a year-ago loss of $5.12 a share. Fourth quarter results included $1.34 per share related to the reduction of a deferred tax asset valuation allowance primarily due to a NOL carryback, offset by a $0.58 per share charge related to valuation adjustments and other writeoffs, and a $0.31 per share charge related to valuation adjustments to land the builder intends to sell or has sold to third parties.

The minutes of the recent Federal Reserve Meeting showed a continued concern over housing. Some members of the committee favored continued purchases of mortgage backed securities. The Fed is scheduled to end its purchase of $1.25 trillion of mortgage backed securities by the end of March. Those in this group held that pulling the plug in March was too soon.

Some members were comfortable with the current stabilization in the housing market and argued that ending the program was the right policy move. Fed officials said that in general, they see continued improvement in the housing market going forward.