Turn On The Lights, Watch The Roaches Scatter, Part 17

Via the excellent Crooks and Liars (thanks for the link, guys) comes news that critical mass in Foreclosuregate may have been reached.  The White House may be cool to the idea of a national foreclosure moratorium, but some 40 state Attorneys General are about to drop the hammer and accomplish the same thing at the state level.

A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to rewrite large numbers of troubled loans.

The move comes amid recent allegations that mortgage-servicers, which include units of major banks such as Bank of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide.

The World's Biggest Financial Mulligan is nigh!

The attorneys' general immediate aim is to determine the scale of the document problems and correct them. But several of them have said that the investigation could force the lenders and servicers to agree to mass loan modifications or principal forgiveness schemes. Other possibilities include financial penalties or changes in mortgage servicing practices.

Lenders and servicers have largely resisted reducing principal on mortgages, instead focusing on interest-rate reductions or term extensions. Banks say they are worried about lawsuits from investors, some of whom could lose money in a principal write down.

Former New Jersey attorney general Peter Harvey, now a trial lawyer in New York, said that a settlement with state attorneys general would likely "to give the banks some cover" to make changes that might otherwise result in lawsuits by investors in mortgage-backed securities.

The mortgage servicers had little to say in response to an impending multi-state probe. "We will work with the attorneys general to address the concerns they have expressed," said Dan Frahm, a spokesman for Bank of America. 

Rewrite the loans and lose trillions, or face up to 40 states suing the bejeezus out of you and lose trillions and then some.  Oh yes, and then the civil lawsuits, the shareholder lawsuits, and the creditors' lawsuits.  Somewhere, a Chief Legal Officer of a major US bank is urinating on themselves and wanting a nap and a juice box.

The market has already locked up.  Home prices will continue to fall because nobody is going to underwrite a loan in this environment right now.  Sales can't proceed.  Demand is effectively zero, so prices must go down, down, down.

Stay tuned for this one.  The banks know they are in egregious amounts of trouble now.  They will do anything to escape.  We can't let them.

[UPDATE]  Diana Olick's take on this is absolutely worth reading.

A source of mine pointed me to a recent conference call Citigroup had with investors/clients.  It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

You know, as in "every other mortgage sale in the last several years is now suspect."  As in the entire friggin' United States housing market is basically a huge scam and nobody really knows now who owns which mortgage...least of all the banks themselves.


We are so very, exquisitely, completely screwed.