Mortgage Greed Will Bite Banks Again

The foreclosure mess has served as a decoy to the real problem faced by the big banks in America. At the height of the real estate bubble banks and their mortgage origination arms were greedily issuing mortgages to just about anyone who could fog a mirror. The reason - fees. The mortgage originators collected their fees upfront which padded the pockets of shareholders and themselves through the payment of outrageous bonuses.

Now the dogs are back to bite them. The loans were mostly packaged and sold to individual investors, institutions, and even Freddie and Fannie. When the loans were sold they were warranted by the banks and investment firms to meet certain underwriting standards. They have fallen woefully short and now investors are beginning to exercise their right to 'put back' or make the banks repurchase the loans that did not meet the warranted standards.

Here is a great piece written by John Mauldin of Millinium Wave Advisors that points to the enormity of the problem. John writes " Anyone who owns stocks in banks with relatively large MBS exposure is not investing, they are gambling that the losses will not be more than management is telling them"

This is scarier than any Halloween ghost or goblin.