Anything that gets overwhelming support from both parties in Congress these days is something they all think is completely insignificant.

A few truths via the link to William Black

*the FBI accurately described mortgage fraud as "epidemic"

*nonprime lenders are overwhelmingly responsible for the epidemic

*the fraud was so endemic that it would have been easy to spot if anyone looked

*the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy

*willful blindness was essential to originate, sell, pool and resell the loans

*willful blindness was the pretext for not posting loss reserves

*both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed

*the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses

*the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation

*many of the big banks are deeply insolvent due to severe credit losses

*those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files

*a "stress test" can't remedy the banks' problem -- they do not have the loan files

I don't know if you've been reading Yves, but she really helps me to better understand the problem:

Although the data points we have seen so far could be considered anecdotal, we have evidence that strongly suggests that major RMBS originators, the investment bank packagers, and the bank trustees failed to convey the notes (the borrower IOU, which is critical to having the legal standing to foreclose in 45 states) to the RMBS trusts starting in 2005, perhaps even earlier. And comments from industry insiders suggest this problem is pervasive.

That puts a cloud over the entire US RMBS market, the biggest asset class in the world. This paper was sold as secured; the ability to offset the cost of borrower defaults by seizing and selling his house is critical to the value of the instruments. And if no assets were conveyed to a particular trust by closing, an even uglier possibility exists: under New York law, which was elected by RMBS as governing law for the trust, it would be considered to be "unfunded", which means it does not exist.

Yves cites Felix Salmon:

...the mother of all legal messes has already emerged from the foreclosure crisis, and threatens not only a large chunk of the financial system but also venerable civic institutions, like the courts, which have thus far emerged from the crisis largely unscathed....

Argentina's sovereign default has been called "the slowest trainwreck in history", but this one might turn out to be slower, bigger, and much less fair. Millions of people have already lost their houses to lenders who didn't have the proper paperwork, and it's unlikely they will ever get any redress. For people who haven't yet been foreclosed upon, however, it could now be a very long time before they lose their house.

The big-picture consequences here are by their nature unpredictable, as no one has a clue how this might all play out. But I can think of a few themes:

1. Bond investors, who have seen the value of their mortgage-backed debt rise impressively over the past 18 months, could find themselves unable to find any kind of bid at all. The paper will still be cashflowing, but those cashflows will be surrounded by enormous uncertainty, and no one's going to want to buy them except at extremely deep discounts until the mess is cleared up.

2. Mortgage servicers will go from being assets to being liabilities, and banks which own mortgage servicers could find themselves on the hook for substantial losses.

3. The time from default to foreclosure will become indefinite, and as a result there will be a significant uptick in strategic defaults, especially in states with judicial foreclosures.

4. The "shadow inventory" of houses which aren't on the market but will eventually be sold once the bank gets around to foreclosing will grow substantially from its already-enormous level.

The bad loans were the beginning; now we're dealing with the hamburger that was made out of them, and the consequences as outlined by Salmon.

1/12/2010 7:14pm:
The Chair laid before the House the veto message from the President. (H. Doc. 111-84). In a Memorandum of Disapproval, the President stated the enactment of H.R. 3326 (Department of Defense Appropriations Act, 2010, P.L. 111-118), which was signed into law on December 19, 2009, has rendered the enactment of H.J. Res. 64 (Continuing Appropriations, FY 2010) unnecessary and accordingly, he is withholding his approval from the bill. In order to leave no doubt that the bill is being vetoed as unnecessary legislation, and in addition to withholding his signature, the President returned H.J. Res. 64 to the House along with the Memorandum of Disapproval . (consideration: CR H10)