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The SEC Sniffs Along the Put-Back Apocalypse Trail

The Securities and Exchange Commission has begun digging into the earliest stages of the mortgage securitization process, according to Reuters.

Sources tell Reuters that the SEC is looking into whether loans were properly transferred to the trusts that issued mortgage-backed securities. The commission has sent Bank of America, Citigroup, JP Morgan Chase, Goldman Sachs, Wells Fargo and others subpoenas asking about their role as "master servicers" in mortgage securitization deals.

The latest probe is apparently an off-shoot of the probe into foreclosure practices.

In other words, the SEC has picked up the script that the blogosphere — especially Yves Smith of Naked Capitalism — started following back in October. The basic plot goes like this: robo-signing was a cover-up for missing mortgage documents, those docs were missing because the mortgages were never properly transferred to the securitization trusts, the failure to transfer the mortgages could give rise to an unwinding of mortgage (un)backed securities, banks could be liable for buy back hundreds of billions of dollars of mortgages they sold.

Now plenty of sensible people think that the script is overly dramatic, and that the great unwind of mortgage-backed securities will never happen. But it cannot be reassuring to the banks that the SEC is now sniffing along this trail.

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Companies mentioned in this post

Bank of America

Citigroup

JPMorgan Chase

Goldman Sachs

Wells Fargo

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