Karl Rove jumped into the foreclosure fraud debate yesterday, as Marcy points out. But how should we judge his entry? I think it’s a sign that the banks know they’re slipping and need to look for reinforcements.

Rove focuses on the AG settlement, but that’s a red herring, as Marcy points out:

But again, why now? Shouldn’t Rove and the banks be a lot more worried about AG Eric Schneiderman’s investigation of securitization? Shouldn’t they be more worried about individual register of deeds demonstrating that most titles in this country are now corrupted? Shouldn’t they worry about suits around the country that may reveal what we all know–that the banks would be lucky to get off with a $20 billion settlement?

I’ll give Rove a couple other things to worry about. First, former employees of LPS, the document processor embroiled in multiple court cases over fraudulent foreclosure docs, are alleging massive error rates, much higher than anything regulators have been willing to admit:

The City of St. Clair Shores Employees’ Retirement System is the lead plaintiff in a class action lawsuit against LPS that was amended and expanded yesterday. The suit is against the company and its three top officers, charing them with violations of Federal securities laws with the intent of inflating the company’s revenues and stock price.

The filing relies heavily on affidavits by 17 confidential witnesses, all former LPS employees, some of them supervisory level. It is thus able to allege that bad practices were widespread and clearly designed and driven by top management.

The document goes through a detailed account of firm’s use of robosigners, surrogate signers (aka forgers) and its document fabrication service, DocX [...] CW16 estimated that 20% of the motions for relief of stay (a filing to allow the bank to foreclose even though the borrower is in a Chapter 13 bankruptcy) were incorrect. This is markedly above the 10% level mentioned by the US Trustee in a Gretchen Morgenson article last weekend (although his comment could be read to allow for even higher rates).

If you think this is bad, the level of errors in borrower files is worse:

According to CW16, on top of the 20% of files with phantom referrals, approximately another 35% of files had some problems in them. Those problems varied, and included among others, an ARM that had improperly adjusted up, a failure to properly account for a borrower’s principal and interest payments, and a failure to properly attribute payments between pre-petition and post-petition that led the banks to try to collect pre-petition obligations they were not permitted to pursue [...]

Moreover, CW2 explained that when LPS did an audit and discovered that LPS had made a mistake that led an LPS servicer client to present false information to a court, LPS would not let its employees “point the finger at LPS.” Indeed, CW2 explained that there was a known and openly discussed policy during his entire employment at LPS of “not fully disclosing what is known, what is being done and what they are finding.” These details were not disclosed to clients, borrowers or the courts. This policy was openly discussed during department meetings

CW2 explained that the end result of these practices is a “three-year time bomb” waiting to explode. Indeed, he explained that problems existed in many LPS loans, and he “knows there are mistakes now” that are still being concealed from clients and courts. He stated that: “out of 100 files, I guarantee 78 are incorrect.”

You do not accidentally get to a 78% error rate in documentation. This was policy at some level, to smooth out the rough patches from faulty securitization. It completely contradicts OCC acting head John Walsh’s cover-up yesterday in a speech to the Financial Services Roundtable, claiming that their “investigation” turned up minimal abuses or wrongful foreclosures.

More troublesome for Rove and his bank allies are the cracks in the unity of US mortgage companies.

American Home Mortgage Servicing, one of the largest subprime mortgage servicers, is urging the Treasury to organize a plan to boost principal reductions for up to 1 million homeowners by unlocking loans from securities.

The servicer is asking for amendments to contracts that govern treatment of delinquent loans in mortgage securities. Currently, most contracts don’t allow sales of loans prior to foreclosure, and in many cases don’t permit a servicer to lower principal when a loan is modified.

American Home’s plan formalizes an idea it first floated within the industry more than two years ago. It hopes to draw more attention now as the government’s efforts to ease payments with loan modifications have had limited impact, foreclosures are still high and home prices have resumed falling.

The smaller servicers want to offer principal reductions so they can at least take a piece of revenue from the loans they originated. They’re trying to claim that the investors are stopping them from doing this somehow, although most investors support principal write-downs. Their real issue is that they have to advance investors payments on loans in delinquency, and the level of those loans has risen precipitously. So servicers are being crushed by their own scam, in a sense.

Simply put, Karl Rove and the banks have a lot more to worry about than an inoperative Attorney General settlement.