Why "MortgageGate" is destined to become a criminal investigation

Washington's Blog (bookmarked to the left) has a great piece on how extensive this Mortgage fraud had become and how it's being revealed to be actual criminality, not just a "mistake". Please follow the links contained within each article for further depth.

Mortgage Fraud perpetrated against investors

And this piece from Zerohedge:Fraudclosure Update: The Crowd Is Getting Restless

The bottom line is that the Foreclosure Fraud being revealed right and left is only the tip of the iceberg. The fact is that the same elements that bring those foreclosures under suspicion are the same elements that make the entire loan origination process invalid.

In most cases it involves separating the mortgage note from the deed holder.

In other cases, it involves actually destroying the physical note (thereby destroying the obligation) and then selling it to multiple parties electronically (counterfeiting).

(Edit: 30 Oct, 2010) Foreclosure mess even worse in non-judicial states.

So what does this mean? It simply means that the banks defrauded their investors, as well as their insurers. It means that, sooner or later, the banks will be paying through the teeth to settle these claims in order to avoid criminal and civil fraud charges.

And with Fannie and Freddie, as government owned entities, possessing subpoena power to obtain the actual mortgage note files (something that private investor/insurer litigants lack) this process will be expedited and VERY PUBLIC. The closest thing to this power lies within the Monoline insurers and their contractual rights to review violations of "representations and warranties".

Furthermore, as John Mauldin stated in his last letter, the European banks are rounding up a Posse to come after the TBTF "banksta's".

And apparently the biggest mutual fund holder of US government debt, Bill Gross, is also buying Mortgage Backed Securities hand over fist in anticipation of "put backs" to the banks. (buy them at pennies on the dollars and put them back to the banks at near face value).

Gross rails against Fed, and apparently buys MBS

I still stand by my belief that Monoline Mortgage insurers are a likely safe harbor in the storm that is approaching. (ABK, AGO, MBI, RDN, PMI, MTG) (note: I am currently long ABK).

I would also consider building small speculative positions in the regional banks, most of which are not subject to putbacks, and also hold their mortgage notes on their books. I kind of like Washington Federal S&L (WFSL), but don't currently hold any. But my mother banks there and they are awesome.

Scrutinizer