Whether people like the Balloon Juice crew like it or not, the dam seems to be completely breaking today on the mortgauge/foreclosure fraud mess, leading more or less inevitably to a complete lock-down.

First, we now have all 50 states on board with a gigantic joint investigation of the foreclosure fraud aspect of this crisis:

WASHINGTON – Officials in 50 states and the District of Columbia have launched a joint investigation into allegations that mortgage companies mishandled documents and broke laws in foreclosing on hundreds of thousands of homeowners.

The states’ attorneys general and bank regulators will examine whether mortgage company employees made false statements or prepared documents improperly.

Alabama initially did not sign on to the investigation. It reversed course after the joint statement was released.

Haha, I knew it would be some Deep South backwater that held out the longest; my personal gut instinct said Mississippi. I was close!

This quote from the Ohio AG who’s been spearheading this push provides excellent ammuntion against those who think we should prioritize keeping the mortgage market ‘functional’:

“What we have seen are not mere technicalities,” said Ohio Attorney General Richard Cordray. “This is about the private property rights of homeowners facing foreclosure and the integrity of our court system, which cannot enter judgments based on fraudulent evidence.”

Precisely. The rule of law has to take priority here, or else, well, everything falls apart.

Moving on, today JP Morgan abandoned MERS, the electronic system banks utilize to avoid actually recording mortgage transactions in accordance with local law.

That’s one down!

Finally, Felix Salmon has been doing some spelunking, and found that the entire mortgage bond market was more or less a sham, and that investors are going to be looking to dump much if not *all* of it back on the banks:

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

Essentially what Salmon found was that the banks that put together bonds made out of mortgages they bought in large groups knew that many of the mortgages were absolutely worthless, because they checked; they hired an outside firm to evaluate them. In one sample from Citi, in fact, over 40% turned out rotten.

The bank’s response to this was priceless; they’d ditch the ones from the random sample that they knew were bad (the samples ranged from 5% to 35% in size, apparently), then, knowing full well that many of the mortgages in the unsampled portion had to be bad as well (that’s how random samples work, you extrapolate from the sample to the larger population), they didn’t put the stop to the deal – they just got a lower price on the pool of bad mortgages, and resold them as bonds to investors.

Without telling them that they had gotten inside information that many of the mortgages were utter crap.

Sure, they’d weeded out *some*, but not all, or even most. And sometimes they used some pretty enormous sample sizes, relative to the population I mean. 35%? Wow.

Ok, so they knew with a pretty damn high level of confidence that many of the remaining, untested mortgages were crap. They bought the good ones, along with the unsampled ones they knew had a lot of duds, at a discount, sold them at a premium, and didn’t disclose to the investors the truth about the overall quality.

I’d sue over that; how about you?

So here’s the current scenario:

-Many, perhaps most, potentially nearly all foreclosures being done by the major banks violate the law, thanks to shoddy recordkeeping.
-All 50 states, plus the District of Columbia, consider this problem to be rampant and endemic, and are investigating. Potentially all foreclosures done in quite a while will have to be re-evaluated, even redone.
-In response, JP Morgan has abandoned MERS, the electronic system used to avoid processing the paperwork properly.
-Of the mortgages not in foreclosure, potentially all of the ones sold during the boom were sold fraudulently, and their current ‘owners’ will be looking to divest themselves of them via lawsuit

Yeah. Moratorium here we come, like it or not.