In the still-developing “mortgagegate” scandal, the Obama White House is pledging its loyalties to the letter of the law, vowing Tuesday to hold “accountable” any bank that engaged in foreclosure fraud.

“As institutions are determining their next steps in addressing these issues, we remain committed to holding accountable any bank that has violated the law,” White House Press Secretary Robert Gibbs told reporters.

“Mortgagegate,” as it’s been dubbed in the media, centers around the use of unqualified workers given jobs as “mortgage experts,” who were then tasked with signing off on thousands of documents required by courts in foreclosure proceedings.

Many times, paperwork was not properly examined. In some cases, according to sworn statements, bribes of jewelry, cars and even houses were offered if an employee would forge documents or notary seals.

And all of it, according to the allegations, happened in an effort to speed up the foreclosure process.

It was enough for attorneys general in all 50 states to initiate investigations. Only 23 states currently require a court approval before a bank may foreclose on a home.

Now, the Obama administration has directed its Financial Fraud Enforcement Task Force to find out whether banks that used so called “robo-signers” actively mislead government housing agencies, or if they committed mail or wire fraud by submitting false paperwork.

“The administration’s Federal Housing Administration and Financial Fraud Enforcement Task Force have undertaken their own regulatory and enforcement investigation into the foreclosure process,” Gibbs explained Tuesday.

It is possible the investigation will result in criminal charges, The Washington Post noted.

In the wake of the “robo-signing” revelations, several major lenders froze foreclosures temporarily to review paperwork, Bank of America being the largest. The institution said Monday it would be resuming foreclosures this week.

The Obama administration has resisted calls for a national moratorium on foreclosures, with spokesman Robert Gibbs warning of the “unintended consequences” of such an action.

While many House Democrats, including Speaker Nancy Pelosi (D-CA), have called for a congressional investigation into foreclosure fraud, Congress is widely expected to attempt legislation retroactively forgiving the mortgage industry for its abuses.

Up to 1.2 million homes are expected to be foreclosed upon this year, according to data provided by RealtyTrac Inc.

By Stephen C. Webster

The unfolding foreclosure fraud crisis isn’t easy to understand, but here it is boiled down. Banks need proper documentation to repossess a home from a family. They need documents about everything from the family’s financial situation to its history of missed payments to its assets. And they need to verify that the information in those documents is correct. But they didn’t. They hired individuals to sign thousands of mortgage papers — legal affidavits, swearing to a judge that they had personal knowledge of the information within — without checking a thing.

Only 23 states require a judge to sign off on a foreclosure, but some banks are now stopping foreclosures in all 50 states. Moreover, they are halting the sale of foreclosed properties to new homeowners.

So who stands to gain? And who stands to lose? Let’s go through the possible impacts on major players and markets, one by one.

The winners:

* Homeowners undergoing foreclosure. Borrowers undergoing foreclosure might benefit from the various state moratoriums: The process is stalled for now, meaning some might have a few more months in their homes, and they know they will not be evicted without due process. States and federal agencies might also work with banks to provide principal write-downs and right-to-rent to ameliorate the foreclosure crisis in the meantime.

The losers:

* Recent purchasers of foreclosed homes. A nightmare scenario: Banks probably foreclosed on and evicted families without proper mortgage documentation. It is unclear whether or how courts might overturn those foreclosures. (One expert I spoke with said it would be more likely that the bank would have to offer some sort of restitution to the evicted family, but nobody really knows.) What if you recently bought one of those houses? There’s a whole lot of uncertainty for you, right now.
* The housing market. The fraud crisis looks certain to prolong the foreclosure crisis — dragging out how long families undergoing foreclosure will remain in limbo, and preventing banks from clearing properties off of their books. It seems possible that the foreclosure fraud crisis will weaken an already-weak housing market.
* The banks and investors. This could be a complete catastrophe. For a detailed but clear explanation of the various liabilities, see Mike Konczal’s description of who owns what and who stands to lose — and an explanation of why this might create a new too-big-to-fail scenario. Rep. Brad Miller (D-N.C.) also provided a clear explanation to The Washington Post yesterday:

There is massive potential liability for the securitizers, which are mostly the biggest banks. The contract was that if mortgages didn’t meet certain requirements, then the securitizer would buy them back. The mortgage servicers and trustees have exclusive control over the paperwork. Both the investors, the people who own the mortgage-backed securities, and the homeowners, really depend on them. There’s been lots of litigation where investors try to get securitizers to buy back the bad mortgages because they were flawed, but that litigation has been stymied by procedural objections. If the private investors can break through that defense and require the mortgages that don’t meet the requirements to be bought back, the liabilities for the biggest banks will be enormous.

A little of each:

* Communities with concentrations of homes in foreclosure. Good news and bad news. On the one hand, families should be able to stay in their homes until the banks and Washington work out the foreclosure fraud crisis. That will benefit communities with lots of families undergoing foreclosure. On the other hand, neighborhoods with high concentrations of bank-owned properties for sale will see a lot of homes remain vacant, pulled off of the market.
* The courts. State attorney generals — Beau Biden in Delaware, Richard Cordray in Ohio, Tom Miller in Iowa and many others — are going hard after the banks. This looks to be just the first wave of what might be thousands of cases for judges to handle. Many housing advocates argue that judges should have had a more prominent role in foreclosure decisions before, anyway — and this might give new life to cramdown legislation in Washington. But the scandal certainly has the potential to swamp courts and cost billions in legal fees. In that sense, lawyers might be the clearest winner from the whole thing thus far.

By Annie Lowrey