Turn On The Lights, Watch The Roaches Scatter, Part 41

David Dayen recaps yesterday's Senate Foreclosuregate hearings.

I’m going to agree with Yves Smith that yesterday’s Senate Banking Committee hearing on foreclosure fraud went really badly for the banks. Now, it’s a Senate hearing, and it’ll soon be filed away with all the other Senate hearings, never to threaten a banker again. But we’ve gone from a point where this issue was basically just a backwater on blogs to an issue where the chair of the Senate Banking Committee is calling it a crisis and begging the Financial Stability Oversight Council to get involved, because it represents an extreme systemic risk.

That’s not nothing. And if it doesn’t mean anything in terms of Senate legislation, it certainly pricks up the ears of investors, who probably saw dollar signs lighting up in their eyes when they watched this hearing. The exposure of the banks is so clear, the violations of the pooling and servicing agreements so multi-faceted, that their prospects of putting back bad mortgages on the banks just went up. You can read my Twitter colloquy with some other bloggers, preserved by Kevin Drum, on this issue. I would add that the mortgage-backed securities market is so big – $7.6 trillion dollars – that you would only need 8% of them to be put back to wipe out the capital of every major bank. And as soon as one – just one – of these put-back suits is successful, you will see an avalanche of filings.

And the banks will be crushed under the sheer mass of them.  There's a reason why the banks are scrambling to get MERS off the liability hook.  People are PISSED OFF.



Dayen concludes:

What I noticed the most is that the Senators understood the worst of the issue because their constituents told them. Every single one of them had a series of stories to tell about homeowners being victimized by their servicers. This is dangerous territory for the banks and they know it. Reports are that they’ve been scurrying to prevent legislative fixes and basically lobby their friendlies in the Congress. The other day, a Treasury spokesman called the behavior of the servicers “simply unacceptable, and servicers who have failed to follow the law must be held accountable.”

The issue is starting to hit some critical mass, and that’s important.

And baby, this critical mass is going to hit the hell back.  The clock is ticking now for every mortgage bank in the country and they know it.  If the banks lose one of these put-back lawsuits before Congress can sneak a bill through clearing them of all wrongdoing that Obama has to sign, it's over.

The race is now on.