Attention is turning to the extent of fraud in the subprime mortgage business, as we wrote last month. The FT is long on generalities and short on hard numbers:

Karen Gelernt, a partner at law firm Cadwalader, Wickersham & Taft, says: “The difficulty is getting a handle on the size of the problem, because there is no real mechanism for reporting fraud for most originators in this market. In fact, they had every incentive not to report.”

Don Ledford, spokesman for the U.S. Attorney's Office in Kansas City, said the type of mortgage fraud now high on the radar are schemes involving teams of conspirators.

"You have one person who is the deal maker, but they also have to have an appraiser who will artificially inflate the price of a home and you've also got to have someone at the title company," Ledford said. "We have had several appraisers convicted because of this."

Two commentators make the link between possible lawsuits and the subprime rescue plan (which seems to be called either Hope Now, or New Hope, which I think is also a Star Wars film, or even, as Mr Bush described it initially, the Freedom Christian Academy of Ponder, TX).

Here's the first: Tim Reason at CFO.com...

But while a rash of foreclosures would cost investors dearly, the plan allows the financial institutions that wrote it to declare large swaths of mortgages in danger of default, and to rewrite those loans without sign-off from homeowners or the investors who own the loans. That may help investors "in the aggregate," as the plan says, but it also may limit the ability of individual investors to sue, and represents a further blow to investor confidence in the practice of securitization...

And the second, the rather less measured Sean Olender:

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

A couple of points occur - 1) as Karen Gelernt notes (in the FT article), it's going to be very difficult for MBS investors to bring these fraud cases, which is possibly why none of them have done it yet; 2) that's making the assumption that the originators deliberately refused to tell MBS buyers about the problems with the underlying loans, when it's just as possible that the buyers simply couldn't be bothered to look. As one insider points out:

Having been both in the third-party due diligence business as well as employed by mortgage originators on the sell side and mortgage conduits on the buy side, I'll confirm that yes, there's tons of information that falls under the general heading of "due diligence" that nobody paid any attention to... I'd flip open the file to see, right on top, page after page of worksheets, printouts, and memos from everyone else who had handled the thing so far indicating some serious problems with it. Discovering what's wrong with these loans involved using the reading skills Miss Buttkicker taught me in the third grade. But the loans were still in the deal, even though three or four people before me had noticed something wrong.
This is the "repurchase" meltdown, folks. Having ignored their own people, the originators sold these things to Wall Street. Wall Street, having ignored the due diligence firms they hired to look at the stuff, went ahead and securitized it. When it started performing just like all the little potted plants said it would, more due diligence firms were hired--or rehired--to go through and find enough "misrepresentations" so that the loans could be shoved back to the originators.

Somehow, I suspect that no one in the chain is going to come out of this looking particularly good.