HUD Secretary Shaun Donovan told the LA Times today that a settlement between top banks and state and federal regulators on foreclosure fraud would be inked in “a matter of weeks.” HUD has been pretty close to the settlement talks, so I don’t totally doubt him, though I’m wondering exactly how many Attorneys General they expect to sign on to a deal, with Republican AGs distancing themselves and Democratic AGs undertaking their own investigations. Interestingly, Tom Miller’s chief spokesman contradicted Donovan quickly after the LAT published, saying “While we certainly hope we can reach a settlement in a matter of weeks, we don’t know how long it will take.”

Donovan said flatly that the banks’ offer of $5 billion in penalties for robo-signing and other fraudulent practices was “unacceptable,” but made no attempt to give a more acceptable figure (regulators reportedly made a $25-$30 billion offer initially, and told banks last week they would be on the hook for $17 billion in civil lawsuits if they didn’t settle). And how could he offer a figure? There hasn’t been enough investigation to determine the extent of the abuses. Heck, Abigail Field did more investigation by herself into Bank of America’s faulty mortgage docs than probably anyone in the foreclosure fraud working group negotiating with the banks.

Are Countrywide mortgage-backed securities really mortgage-backed? Do banks even have the legal right to foreclose on certain homes?

These are just a few of the questions raised since the foreclosure crisis revealed shoddy mortgage servicing practices at many of the big banks – practices that have led to countless investigations and lawsuits. Court testimony by a former Countrywide employee added to the intrigue last fall, because she confessed that many loans there weren’t properly handled, bringing into doubt the validity of Countrywide’s securitization process. Bank of America, which owns Countrywide, quickly silenced the discussion with firm denials.

But Fortune has examined dozens of court records that corroborate the employee’s testimony. And if Countrywide’s mortgage securitizations systematically failed as it appears they did, Bank of America’s potential liability dwarfs its shareholder equity, as the Congressional Oversight Panel points out.

Field is referencing Countrywide v. Kemp, and the sworn testimony of Linda DeMartini, a top official at BofA. She acknowledged on the record in a deposition that Countrywide never conveyed the mortgages to the trusts, and that Countrywide notes “weren’t endorsed except on a case-by-case basis generally long after securitization ostensibly occurred.” This would mean that the mortgage-backed securities composed of Countrywide loans are, in fact, non-mortgage-backed securities. And Field did the grunt work of looking at the court records, which back up DeMartini’s claim. None of the 104 Countrywide notes she looked at in two New York counties were endorsed originally. Read the whole story, it’s a good one.

This is a bombshell. If the regulators were in any way competent, DeMartini’s testimony would have stopped them cold. They would have engaged in the same analysis as Field, and presented to BofA the stark truth that they have no ability to foreclose on Countrywide loans that were securitized, which would lead to all kinds of charges from both homeowners facing foreclosure, and from investors who were scammed when they purchased the securities. They would have signaled to the other banks, who did little different during the bubble, that they had the goods on them as well. The underlying exposure is massive. That would be the kind of ammunition needed to force compliance from BofA. But none of this has been done.

The Obama Administration knows that housing is among the biggest, if not the biggest, problems with the economy right now. The President said it in a meeting with House Democrats yesterday. I liked this side note: “The President said housing was the main thing dragging down the economy, with Geithner nodding solemnly like they’d done everything humanly possible for the last 27 months to fix the housing market.”

If the President or Treasury actually wanted to fix the housing market, the ability to do so is lying in all those court records, which show the systematic failure of securitization and the massive exposure the banks hold as a result. This would really help the economy – foreclosure problems are seen to add 1.25 points to the unemployment rate, according to one survey. But instead, they’ve allowed the banks to pick and choose at their discretion who gets a modification. They’ve allowed the banks to use HAMP as a predatory lending scheme, to squeeze a few extra payments out of borrowers they planned to evict anyway. They’ve even allowed banks to continue to screw even their customers who they gave a modification.

And this “settlement,” whatever it offers, won’t change that fact.