NEW YORK (Reuters) - A group of mortgage investors seeking to pressure lenders to buy back potentially billions of dollars in bad loans says its ranks are swelling and it will soon deliver strong evidence that banks have treated investors unfairly.

Bank of America customers use an ATM machine outside a branch in Washington October 8, 2010. REUTERS/Richard Clement

New York securities lawyer David Grais and Dallas-based Talcott Franklin on Wednesday met with more than 50 large mortgage bond investors to try to convince them to fight banks.

Their effort is gaining fresh momentum due to recent complaints from foreclosure lawyers about sloppy paperwork from banks. This has focused investor attention on the extent to which banks may have been too understaffed for years to properly make and service mortgages.

A source said investors at Wednesday’s meeting in New York included Paulson & Co, MetLife, Prudential and the Federal Reserve Bank of New York. Paulson and the New York Fed declined to comment, while the others were not immediately available to comment.

A competing law firm last week moved a step closer to suing Bank of America Corp on behalf of Pacific Investment Management Co and others. Those investors alleged that the bank failed to properly service their mortgages, and sold them loans that should never have been sold in the first place.

“The world has changed in the last three weeks as the consortium (of investors) has gone viral, almost,” said William Frey, president of Greenwich Financial Services, who is helping support Franklin’s effort to aggregate holders of residential mortgage-backed securities.

The investors have accumulated key ownerships in 2,600 risky U.S. “private-label” mortgage securities, up from 2,300 six weeks ago.

They want to force lenders to buy back mortgages that did not meet the terms that investors demanded when they originally bought the mortgage-backed securities. U.S. mortgage giants Fannie Mae and Freddie Mac have won billions of dollars back from banks based on similar demands related to bonds they guarantee.

A THRESHOLD TO CROSS

In order to force banks to buy back loans, investors holding at least 25 percent of the private mortgage bonds in a particular issue must band together and declare an event of default. Then they can sue the servicer -- the bank that collects payments on the mortgages.

Franklin and Grais are collecting information from investors about their holdings. The lawyers are pledging not to disclose ownership information to other investors, only to bring potential plaintiffs together to help overcome the 25 percent threshold for any particular bond issue.

The RMBS clearinghouse has nearly doubled to 125 investors as of last week, from 65 three weeks earlier, Greenwich’s Frey said. The total for which the investors had voting rights wasn’t yet determined, he said, but that amount was $600 billion before the growth spurt.

Investors undecided on joining the effort were gathered at midtown Manhattan’s The Core Club on Wednesday. Some said they were considering joining Franklin, while others worried a still fragmented investor base would unhinge the effort.

“We can do something,” Franklin assured the investors. “We can do something here.”

Franklin also outlined a letter to bond trustees, complaining that foreclosure documents rushed through courts by “robo-signers” do not benefit bondholders, and asserted the practice could have only been motivated by pursuit of profits.

The investors are “deeply concerned” that servicers will push costs related to fixing this problem back to bondholders, the letter says.

Franklin’s investors have so far not named a servicer that they may target in their broader effort. But evidence from an initial review of 200 bonds where mortgages were modified found servicing contract violations in every trust, Greenwich’s Frey said.

What’s more, the bigger the group gets, the more it is likely to act, he said. Investors conflicted on pursuing servicer failures will be diluted as the numbers rise.

Laurie Goodman, managing director at Amherst Securities, said investors could potentially push banks to buy back some $97 billion of mortgages.

That number could grow if more investors join the effort, Grais said.