First it was the New York Fed, now the FHFA itself (regulators of Fannie and Freddie) is getting involved in putbacks. The WSJ has just reported that the GSEs have hired law firm Quinn Emanuel as the "agency considers how to move forward with efforts to recoup billions of dollars on soured mortgage-backed securities purchased from banks and Wall Street firms... The FHFA hasn't disclosed the targets of its subpoenas, though some banks have acknowledged receiving them, including J.P. Morgan Chase & Co. The probe is focused on so-called private-label securities that were originated by mortgage companies, packaged by Wall Street firms and then sold to investors." Not to be confused with RoboSigning, which is at the heart of the Fraudclosure and could serve as a catalyst to what some claim as the unwind of the multi-trillion MBS market in a worst case scenario, this is a parallel effort that seeks to get banks to repurchase far more of misrepped and miswarrantied mortgages. As we previously disclosed, it is precisely this ongoing action that Bank of America and Wells Fargo have been (under)reserving against: and if the GSEs, together with the FRBNY, Pimco, BlackRock and who knows who else, are sensing the current moment as one of terminal weakness for the mortgage servicers, who knows how many billions in mortgages could be putback to the TBTF banks, who are luckily flush with still fresh taxpayer cash and trillions in excess reserves. Either way, it appears that while the New York Fed is going after BofA, the GSEs are about to dine on Jamie Dimon. Either that, or all this is a smokescreen to promptly settle all current and future possible litigation in an adversarial process involving government entities, and thus streamlined to a mutually amicable resolution.

More from the WSJ:

The FHFA's efforts could ultimately lead to a settlement that would avoid protracted legal battles, analysts said.



"There's going to be much more incentive to negotiate seriously and quickly than if they had done this seven months ago, when people were blithely ignoring the fraud," says William K. Black, a former federal bank regulator who is now an associate professor at the University of Missouri-Kansas City School of Law.



Estimates about banks' ultimate exposure vary considerably because it isn't clear how aggressively investors will pursue claims, or how successful they will be. Banks could face between $55 billion and $179 billion in repurchase demands from investors, according to Compass Point Research & Trading, a Washington boutique investment bank. Estimates from FBR Capital Markets say repurchase demands could be lower, between $24 billion and $51 billion.



The FHFA subpoenas could mark the beginning of a new attempt to recover losses on soured mortgages from banks.

Of course, the GSEs' involvement in this mess could open them up even wider to potential liability:

So far, most efforts to force banks to repurchase mortgages have focused on mortgages that Fannie and Freddie bought and guaranteed themselves, and not from mortgage securities issued by Wall Street firms.



The mortgage giants are sorting through their growing pile of delinquent loans to find sloppy or fraudulent loan underwriting that constitutes a violation of representations and warranties.



Those repurchase demands have risen as delinquencies mushroomed. Fannie and Freddie have put back $6 billion in mortgages during the first half of the year, and banks could face another $22 billion through 2012, according to a report published Tuesday by analysts at RBS Securities Inc. Banks, for their part, have grown more aggressive in recent months in challenging those put-back efforts.

For those unsure how the GSEs can pursue legal action against banks for basically doing their work for them, the WSJ explains:



While Fannie and Freddie don't make loans directly, they support housing markets by buying mortgages from banks and then selling them to investors as securities, providing guarantees. But during the housing boom, Fannie and Freddie augmented their role in the housing market by purchasing privately issued securities as investments. They became two of the largest investors in those bonds.



Those securities were often backed by subprime loans and mortgages that required little or no documentation of borrower incomes, which deteriorated sharply once home prices fell. Fannie and Freddie couldn't purchase those loans directly, but they were allowed to invest in slices of the securities that carried triple-A ratings.



Fannie and Freddie purchased $227 billion of bonds backed by subprime and other risky loans in 2006 and 2007. The value of those securities plunged as the housing boom turned to bust, and losses have accounted for around 9% of the firms' capital hole. So far, the government has injected $148 billion to keep the mortgage giants afloat.

So why subpoenas?

Some analysts say Fannie and Freddie, which touted their unparalleled mortgage-market expertise, could be hard-pressed to argue that they didn't know what they were buying.



But the subpoenas could help Fannie and Freddie access loan files for the mortgages backing their bonds and to demonstrate that the loans didn't conform to underwriting guidelines.



The loan files "are really the Holy Grail here," says David Grais, a New York securities lawyer who represents the Federal Home Loan Banks of San Francisco and Seattle, which have sued Wall Street firms to buy back soured mortgage securities.



Difficulty obtaining those loan files is one reason why there have been so few efforts by investors to force repurchases so far. Investors need to access the loan files to determine if there has been a specific violation of certain contracts, but they can't petition trustees for loan pools to take action without first identifying that breach.



"It's a real Catch-22 for them," says Isaac Gradman, a San Francisco-based consultant.

Subpoenaing is a uniquely FHFA-based privilege, which however will likely open up a can of worms once all the heretofore private data enters the public domain:

If the FHFA is successful in proving that loan files didn't meet underwriting standards or that their ownership chain wasn't properly transferred during the securitization process, that could pave the way for other investors to make similar challenges, said Joshua Rosner of investment-research firm Graham Fisher & Co.

No matter how this particular storyline developes, one thing is certain: in the nearly $14 trillion US mortgage market, things will get heated. Throw in midterm elections in some angry politicians, and it will get really interestng.