If you thought the fake doc foreclosure fraud crisis is bad, wait till you get a load of what could happen once people start looking at the pending mortgage bond meltdown. Reuters blogger Felix Salmon dug into the documents and he says it looks like banks have been lying to investors about the quality all this time.

The banks had a 3rd party check out the quality of the mortgages, running the numbers to see if the mortgages actually lived up to the originators’ underwriting standards (such as they were). When the bank found that the mortgages didn’t live up, instead of rejecting them, they simply negotiated for a better price. And, they didn’t tell investors that a big chunk of the mortgages were failing the smell test.

“The banks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool,” Felix writes. “That’s a lie of omission.”

It’s one thing to unravel individual houses. But when you start talking about the mortgage bond pools, collected mortgages that are thrown in together and repackaged as investments, watch out. Next stop, lawsuit city! We’re talking both class action and SEC.

The enormous mortgage-bond scandal [blogs.reuters.com/felix-salmon]

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