Fannie and Freddie on the Mortgage Fraud Warpath.. Wall St. Banks and Mortgage Securitization approaching a "come to Jesus moment"?

Fannie Mae and Freddie Mac, which were effectively nationalized by the Federal Government are looking for loan files held by mortgage trusts as they look to "put back" many of the bad loans they were sold by the big Wall St. banks:


Some analysts say Fannie and Freddie, which touted their unparalleled mortgage-market expertise, could be hard-pressed to argue that they didn't know what they were buying.

But the subpoenas could help Fannie and Freddie access loan files for the mortgages backing their bonds and to demonstrate that the loans didn't conform to underwriting guidelines.

The loan files "are really the Holy Grail here," says David Grais, a New York securities lawyer who represents the Federal Home Loan Banks of San Francisco and Seattle, which have sued Wall Street firms to buy back soured mortgage securities.

Difficulty obtaining those loan files is one reason why there have been so few efforts by investors to force repurchases so far. Investors need to access the loan files to determine if there has been a specific violation of certain contracts, but they can't petition trustees for loan pools to take action without first identifying that breach.

Fannie and Freddie seek illusive mortgage loan files

It's also why these investors are looking to the legal discovery being conducted by the monoline insurers.

But one might ask, why do they care, so long as the investors are being paid by the monoline insurers? Well.. if the monolines are able to prove that "chain of title" was not properly followed, and the mortgage loans fail "reps and warranties", it will bring into the question whether any bonds backed by securitized mortages in those trusts are worth the electronic paper they are recorded on.

CitiBank presentation on 3 scenarios for resolving the Mortgage/Foreclosure mess:

I found this one paragraph to be particularly disturbing, since we know the US Treasury is hunting for revenue and the very process by which these mortgages were securitized may constitute serious tax implications.

To qualify as a REMIC under the IRS code and enjoy the beneficial tax
treatment, the trust (1) must be passive and (2) cannot acquire any new assets
90 days following the trust’s creation.

If, as described above, mortgage documents were never correctly passed
through to the trust when it was established, then the trust may not actually
own the underlying mortgages it purports to own. Although it is possible that
this issue could be remedied by some legal maneuvering, doing so could
violate the REMIC status since the trust would be acquiring assets long after
the aforementioned 90 day period has expired. Such a violation in turn could
trigger a sizeable tax burden for investors. Our speaker indicated that there are
a handful of open questions on this front and that this is a legal gray area.

Citi Mortgage presentation

Here's some more interesting reading to further explain the problem:

Bank Of America foreclosure problems

Since it can be legally argued that the "chain of title" never actually passed to these trusts to begin with, trying to "fix" that chain may lead to violating the trust's tax exempt status.

Therefore, from the investor's point of view, they MUST press for the banks to buy back these suspect loans because resolving these foreclosure inconsistencies in "chain of title" leaves them vulnerable to massive tax liabilities.

Capice'?? Indeed this is an unholy can of worms that has been opened.

And once again, I suggest watching the monoline insurers like ABK, MBI, RDN, PMI, and MTG. They are demonstrating increasing strength and could act as a "Put" on another financial crisis.

Scrutinizer