FCIC Launching Probe into Mortgage Market, whether or not securities are invalid

Add Phil Angelides to the growing list of regulators investigating whether banks committed fraud in the $6.4 trillion mortgage-bond market, the FOX Business Network has learned.


The Financial Crisis Inquiry Commission, which Angelides chairs, has begun investigating whether mortgages packaged into bonds and now held by investors including government agencies like Fannie Mae and Freddie Mac were done so improperly, thus calling into question the legality of trillions of dollars of debt, according to people with direct knowledge of the matter.

The inner workings of the mortgage-backed securities market have come under intense scrutiny in recent months following revelations that big banks may have committed fraud by hiring so-called robo-signers to approve foreclosure applications on tens of thousands of mortgages. At issue: Whether the robo-signers properly approved foreclosures and whether people forced from their homes received due process.

The latest twist in the robo-signer controversy involves whether improper foreclosures and banks failing to follow proper legal procedures will call into question the mortgage bonds themselves. Many of the foreclosed mortgages aren’t held by banks, but have been placed in bonds held by investors. The money thus is returned to an investor holding the bond.

But if the foreclosure has been done by a robo-signer, or if the banks creating the bond did so improperly, as a recent congressional study suggested, then the bonds themselves could be declared illegal. That could pose big problems for the banks that created the mortgages and sold the bonds, like Bank of America (BAC: 11.96 ,-0.14 ,-1.16%) and JPMorgan (JPM: 39.70 ,-0.35 ,-0.87%) because it would allow investors to “put”, or force the banks to buy back, the underlying mortgages.

A spokesman for Angelides had no comment on the matter, but according to one person who had been interviewed by a commission investigator, the thrust of the inquiry involves “whether mortgages were properly securitized.”

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