Investigation Reveals Mortgage Bonds Are Ticking Time Bombs

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Mortgage-related muddles have been taking up a lot of headline space recently as banks take it on the chin about their laxity in upholding a $25 billion foreclosure settlement, and mortgage-mess maker Bank of America (NYSE: BAC  ) faces two active lawsuits concerning its treatment of homeowners and investors.

Now, the investigator that unearthed the robo-signing scandal has revealed that a new mortgage-based morass is in the works, as billions of dollars of hidden losses within mortgage-backed securities come to light, costing investors dearly.

Bank of America involved, again
Reuters reports that fraud fighter Lisa Epstein discovered that mortgage servicers have been feeding mortgage bond investors incorrect information concerning the mortgages that lie within the MBSes they hold. Servicers such as Bank of America and Ocwen Financial (NYSE: OCN  ) , for example, have supplied information to bond trustees Wells Fargo (NYSE: WFC  ) and Bank of New York Mellon (NYSE: BK  ) indicating that homes that have long since been sold or paid off are still in foreclosure.

How could this happen? Some could be in error, and as a B of A spokesman points out, other factors such as insurance settlements or litigation tend to draw out the timelines until closure. However, analysts note that there could be another, more sinister reason: Servicers can continue to charge investors fees while a foreclosure is considered pending. This practice is causing billions in losses to mount, and much of this problem won't be known until sometime in the future.

A tidal wave of lawsuits in the offing?
As these losses are discovered, there seems little doubt that investor lawsuits against companies like Ocwen and B of A will accelerate. The article notes that a recent $1 billion loss on MBSes that contained subprime loans produced before the financial crisis had paperwork discrepancies that went unremarked for over a year.

For their part, trustees Wells Fargo and BONY say that they were dependent upon the information furnished to them by the servicers, and had no knowledge of these issues. This is entirely possible, though it may not help keep these banks from becoming embroiled in the upcoming scandal.

BONY, for instance, is currently playing a starring role in the Article 77 hearing, on hiatus until next month, regarding its role as trustee in the Bank of America $8.5 billion settlement with 22 institutional investors.

Speaking of that case, the Reuters piece states that some of those toxic bonds are at issue in those proceedings, which makes this new revelation all the more unsettling for Bank of America, which will doubtless be at a disadvantage in that case, as well as the many more that will surely be coming its way in the near future.

Wells Fargo's dedication to solid, conservative banking helped it vastly outperform its peers during the financial meltdown. Today, Wells is the same great bank as ever, but with its stock trading at a premium to the rest of the industry, is there still room to buy, or is it time to cash in your gains? To help figure out whether Wells Fargo is a buy today, I invite you to download our premium research report from one of The Motley Fool's top banking analysts. Click here now for instant access to this in-depth take on Wells Fargo.

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