FedUpUSA

We may be about to find out.

The number of deals the RMBS Investor Clearing House now has a big enough interest in to request action by bond trustees has climbed about 30 percent since a July statement by Franklin. The clearing house allows bondholders to coordinate without divulging to each other which securities they own.

The group added three new portfolios Nov. 12 that weren¡¯t included in the most recent total, Franklin said in an e-mail from Dallas that day. A quarter of bond investors in any single deal marks the minimum threshold to force mortgage-bond trustees to grant access to loan files that may help investors prove mortgage sellers should buy back bad debt or take other action.

Remember, the allegations made by various legal folks in the practice (and apparently validated by the case law thus far) is that not one note has been able to be produced that contains all of the required conveyances and endorsements.

What’s going to happen when (or if) these folks gain access to the files and find that they’re missing – that is, that the custodian doesn’t have them?

Well now that would be interesting, no?  “Mortgage-backed securities” that in fact have no mortgages in them?  Why that would be a wee problem, no?

Everything we know up to this point strongly suggests that this is exactly what is going to be discovered, and as a consequence, the RMBS Investor Clearing House is definitely an entity to watch.

The wheels of justice turn slowly, but they do turn, and if in fact basically none of these notes have been properly conveyed into the trusts, and as such the trusts are a legal nullity, then investors have spent billions of dollars as unknowing participants in a massive fraudulent scheme.

Yes, that’s sarcasm:

The mortgage firms are looking at every loan more than 90 days past due and “asking us basically to give them all the documentation to show that it was properly underwritten,” JPMorgan’s Scharf said. “We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back.”

That’s exactly what I said would happen more than two years ago.

EVERY LOAN.

If there was appraisal fraud OR

If there was income fraud OR

If there was DTI fraud OR

If the automated underwriting was gamed OR

If there was asset fraud

THEN the bank gets rammed with a repurchase demand on the bad paper – paper that is 90 days+ and, in essentially every case, dramatically underwater.

The “dream” that this will result in “only” $7 billion in losses (30% of the repurchased amount) is a fantasy.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said.

Ding ding ding ding ding ding.

The truly ugly news isn’t found in these mortgages.  It is found in the second lines – HELOCs and “Silent Seconds” – that are behind these agency mortgages.  Those are worth zero once the first defaults, and when the repurchase demand is perfected the auditors are going to force these loans to be recorded at their likely recovery value – which is zero.

There are literal hundreds of billions of dollars worth of that trash on all of the big banks balance sheets, and all of it is being carried under assumptions that nearly every one of those loans is “money good.”  80% of the dollar value of these HELOCs and Seconds are in the bubble areas and of those virtually all are behind an underwater first.

The assumption that these loans are “money good” is blatantly and intentionally false.  It is a fiction that our regulators, examiners and auditors have foisted upon the public, and if you rely on it, you will get burned.

Oh, JP Morgan’s net income for all of 2009?  $11.7 billion.

They recorded $1.6 billion last year for this “expense”, and I’m willing to bet that it’s double that or more for the coming year, not to mention the impairment or outright write-off of the seconds.

That would be roughly 20% of their net earnings – not exactly an immaterial amount of money.

PS: $21 billion is tiny compared to the tsunami headed these folks’ direction.  In the end every piece of this bad paper is going to head back to the securitizers and originators.  All of it – and the seconds behind that paper are all going to wind up marked to zero, because they are subordinate to an underwater first.  It is simply a matter of time before the people who hold these RMBS and the more complex securities structured on top of them decide to come after the banks and, to the extent that they can prove malfeasance or misfeasance, these banks will eat it.