Yesterday there was an announcement on the wire about Beezer Homes being investigated for alleged mortgage fraud.

Beezer, apparently, was selling these loans off to FHA, which of course got the Fed's to perk up their ears REAL fast, since that's the federal government being ripped off here.

Well, now here's the problem. All the lenders have been making these "liar loans".

What's a liar loan? I've talked about it before - its a "stated income" loan, or even worse, what's known as "SISA" (stated income, stated assets)

Now why, might I ask, would you want such a loan?

The apologists all point to things like people with lots of commission income (which might be unstable), a small business which shows a taxable loss (or little profit) but lots of income (how do you do that, exactly, and legally not pay taxes?), or a second person in the home who is going to help with the mortgage payments (so why can't they document their income and your relationship to them so that the lender can evaluate the risk of them "disappearing"?)

See, what it comes down to in each of these cases - and many more - is that people simply don't want to document their income because if they did then the lender could qualify the quality of that income stream and what the odds are of it becoming impaired or disappearing entirely!

But isn't that precisely the purpose and intent of underwriting loans?

That is, figuring out what the person's likelihood of repayment is before you lend the money?

When you offer a product that is intentionally designed to allow people to avoid safe underwriting guidelines, how do you argue that this is not an inducement to commit fraud or part of the fraud itself?

I argue you cannot.

While "private action", as Bernacke said today, does provide bondholders with options if and when they find out that these loans really are "liars loans", there is, in fact, a government tie-in - and a reason why, in my opinion, federal prosecutorial action is extremely likely against all of these lenders.

That is the fact that these organizations didn't keep the risk for themselves. They attempted to pass it off on other people by turning these mortgages into tranches of debt - essentially bonds - and then sold them off into the market with limited recourse. They did so knowing that they intentionally did not verify the income and assets of the borrowers even though they were able to if they had wanted to.

And, they passed the bag to others.

Now that's bad enough. But what's worse, and why I believe that federal criminal action may come down on these people, is that pension funds bought many of these CDOs!

And that's a problem, because if and when pension funds blow up, their obligations become obligations of the PBGC (Pension Benefit Guarantee Corporation), a chartered corporation set up under ERISA.

This is the "hook" that federal prosecutors need to start sticking their heads under the kimono.

When it starts, I predict it will be fast and furious.

Beezer Homes is, in my opinion, just the tip of this iceberg.