If you think the mortgage mess is over, you're sadly mistaken.

If you're operating under the premise that the losses have been (mostly) recognized and we are now going to see "write ups" somewhere down the road, you're more than wrong.

You're delusional.

Truth is that the real damage hasn't even begun.

That damage is going to come from.... drum roll...... fraud.

Here's fruition of a prediction I made back last April:

"As mortgages included in some supposedly investment-grade securities hit default rates over 80%, bond insurers are looking for signs of fraud in individual loans and even entire packages of mortgages they have insured.

Chances are they will find lots of it, some experts say, which could lead bond insurers to demand that issuers repurchase the loans. This would transfer the pressure to hard-pressed issuers, including investment banks and loan originators, to make good on the bad loans."

Bang.

Let's talk for a minute about how big of an issue this is.

In 2006 and 07, as the housing bubble was starting to burst, tremendous market share "gains" were made in the ALT-A space. "ALT-A" are loans where income was undocumented (so-called "liars loans") or otherwise contained "tricky" features such as "Pay Option" mortgages.

These "ALT-A" loans constituted huge percentages of production - hundreds of billions of dollars - in 2006 and 2007. And every study done on them thus far on the production during those years has shown that half of these mortgages - or more - contain significant overstatement of income.

That is, fraud.

As noted in my article from April 2007 each and every one of these mortgages is subject to being "put back" on the originator. These loans will flow backward just as they flowed forward originally, continuing upward until they find a "home."

Where's the "home"? When the firm that originated or securitized the loan is found.

What if the originator is out of business? Then the investment or commercial bank that securitized that debt is going to wind up stuck with it, because there is no way they will win an argument in court claiming that they had no ability (or obligation) to detect this fraud, when the products were designed to enable it, and it required only marginal investigation for them to be able to detect it (such as pulling the borrower's tax returns.)

Let this sink in folks - HALF of all ALT-A production from 2005-2007 is subject to being "put back" on the issuer, and current recovery on defaulted mortgages is about 50%.

This means that the actual "expected damage" in money (that is, loss) terms is roughly 25% of all ALT-A production from the years 2005-2007.

If the equity markets were half-rational every single investment and commercial bank that had securitized mortgages (that would be basically all of them) in the ALT-A space would be getting hammered - right now - down to single digits.

Every one of these firms is on the hook for tens if not hundreds of billions of dollars worth of these mortgages, and the ones they will end up "eating" are the ones that are non-performing - not only are they the ones that contained fraud but they're also the ones that will prove to be uncollectable!

Case-Schiller is continuing to show deterioration in home prices, down 12.7% .vs. -10.6% last month. All 20 metro areas showed price declines, with only one managing to remain positive on an annual basis. Home prices continue to deteriorate (and will for some time to come); no surprise here for anyone with half a brain, but the "market crooners" will almost certainly continue to "call a bottom." Yeah, ok. Wake me up when we see three consecutive months of positive prints.

One of 112 households has received a default notice, and one in 194 received one in the first quarter of 2008, according to RealtyTrack. RealtyTrack now says that they expect foreclosure notices to peak in the 3rd or 4th quarter of this year (of course NODs lead actual foreclosures by four to six months, so the economic damage will continue for a long time beyond that peak.)

Countrywide (NYSE: CFC) reported a monstrous loss this morning. Now remember, Mozillo told us all in the third quarter that they would be posting earnings starting in 4Q. Guess what - he was not only wrong, he was WAY wrong - two quarters running. Yet BAC says they're "committed" to the merger? Huh?

Here's another prediction - BAC is intending to use CFC as a "dumping ground" for its toxic waste, will keep the firm as a wholly-owned sub so it is legally distinct, will dump their trash in there and then BK the "subsidiary" with some swansong about how things were suddenly "worse than anticipated", keeping the servicing platform.

Oh, and since I believe this is their intent that would make the entire transaction and subsequent bankruptcy fraudulent, but they won't get tagged for it, because once again, fraud, if you're a bank or other financial institution, is not an offense any more in the United States.

Aloha Airlines which shut down its passenger service recently just shut down its highly-profitable freight service, which many had predicted would survive. This has not been widely reported at all, but it will have severe and immediate negative effect on Hawaii. The reason? GMAC cut off their financing. Yet more "credit crunch" comes and whacks a business upside the head. No credit, no operating funds. GMAC, of course, has its own problems caused by handing out far too many "fog the mirror" loans to both homeowners and car buyers. Oops.

Small business is getting hammered by commodity price inflation. Big business can hedge fuel costs, but small businesses have no chance - they get creamed immediately under these conditions. Next prediction - mass bankruptcies and simple business shutdowns will start to hit within the next 2-3 months in the small business sector. At this point it is unavoidable, irrespective of any actions taken to try to "fix" the commodity mess. The damage has been done and cash flow has become too impaired, especially for those firms that are dependant on transportation (e.g. small businesses that have to operate trucks to haul materials around)

Consumer confidence ain't good - down again to 62.3% from 65.9% in March. Present situation index fell 10 points from March to April. The expectations over the next three to six months aren't doing well either. Why? Simple - food and gas prices. Expectations, by the way, dropped before "present situation" originally and did not bounce at all, indicating that in the next three to six months we're not going to see improvement in the economy.

Nice box you put yourself in Ben. Did you listen to OPEC? Every 1% you cost the dollar with your foolish "liquidity now!" tamping down of the EFF results in a $4 rise in the price of oil. And oh by the way, they have the oil and we want some.

Never mind the global food problem you sparked. See, all that liquidity you threw around, all the 23A Exemptions you handed out, and the willful turning of your head to fraud and bubble economics has now blown a huge bubble in foodstocks. Your "banker buddes" and their Hedgies piled into commodities, driving up the cost of food - a bubble that is even worse than housing, in that starving to death certainly trumps being broke when it comes to "actual harm."

This has led directly to food riots and will, if we're not careful, result in famine and millions of deaths. Its one thing to talk about "stealth costs" and financial******of the middle class, but now you're being tagged as the proximate cause of actual starvation.

Still think you did the right thing Ben?