This news on WaMu is something I've been expecting for a while:
After lenders like WaMu originate home loans, they are often packaged up into mortgage-backed securities and sold to institutional investors around the world. The process gets the loans off the lenders' books, freeing them from the risk that those loans may default and also providing fresh cash to make more new mortgages.But if parts of the origination process are found to be fraudulent, investors can potentially force lenders to buy the mortgages back at the original price. If the assets have suffered delinquencies and have dropped in value, the lender takes a financial hit.
If parts of the origination process are found to be fraudulent? Ha! Imagine WaMu or Countrywide trying to explain to a jury that making no-doc, no-money-down, cash-back, inflated-appraisal loans to unemployed 23-year-olds and then selling the loans to unsuspecting investors was not fraudulent!
WaMu and Countrywide have enough problems with the loans they still hold in their portfolios. If investors start forcing them to take back the garbage CDOs, it's Game Over.