The real bombshell of the past 24 hours in housing was the report of the FHFA Inspector General, the second in two weeks damning the conduct of the GSEs In this case, Fannie Mae was found to have known about foreclosure fraud, including serial fabrications of foreclosure documents and robo-signing, as far back as 2003.

Maybe it’s because I’ve done so much reporting on the foreclosure fraud issue, but I have to admit to some surprise that the firing of two Assistant Attorney Generals down in Florida, the hotbed of the housing crisis, hasn’t gotten much attention nationally. In my mind, this is the state-based equivalent of the US Attorney scandal. You have a conservative Attorney General who has fired two investigators who were tasked by a previous Republican regime with finding violations of the law. When they proved too effective for the next regime to stomach, they were canned. And now, the new AG, Pam Bondi, is smearing their reputations.

Even if the banks somehow get the borrower complaints out of the judicial process, I don’t see any way they can get the same deal with investors in mortgage-backed securities. And remember, investors and borrowers are pretty well aligned here. They both want modifications and not foreclosures. The difference is that the investors have the means to fight the banks and servicers on this point, albeit in a way that maximizes their self-interest.

I’m not inclined to believe the conservative argument that Fannie Mae and Freddie Mac somehow caused the housing crisis by lending to poor people. I am inclined to believe that Fannie and Freddie are as responsible as the major banks for the abuse and fraud in mortgage servicing, in fact more so, because as a quasi-federal entity they had the ability to use regulatory means to put a stop to it. And now, we have pretty incontrovertible proof that Fannie Mae, at least, knew about mortgage servicing problems as far back as 2006.

The usual political wrangling has accompanied the Treasury Department’s white paper on Fannie Mae and Freddie Mac. But this is yet another issue happening in a vacuum, divorced from actual circumstances. If you want to talk about reform of the secondary mortgage market, fine. But it’s almost impossible to do so without recognizing the total breakdown in that market and what that has done to housing as a whole.

I submit a few things for the record. First, you have foreclosure mills filing fraudulent documents to cover for the fact that they lost or otherwise bungled mortgage assignments for millions of loans when they securitized them over the past decade. These are the same private actors who would be responsible for the entire securitization market under a plan that phases out Fannie and Freddie.

The broken securitization market is the original driver in this persistent fraud from foreclosure mills and servicers. And the mechanism used by the private market to facilitate their securitizations, namely MERS, was not legal in any way. Yet they continued to use it in violation of state property law.

Simply put, the problem with the housing market right now, not the problem for investors or banks but the problem for the people living in the homes, is that it has become more lucrative for many servicers to foreclose on the property than to work out a modification. That changes all of the incentives around housing, and makes fraud attractive. That the system was swamped with calls for modifications after pushing people into loans that they couldn’t afford when they recast makes fraud all the more attractive. Foreclosure pays in particular for servicers who don’t also own the loan: for them, they’d rather pay a foreclosure mill a flat rate to process the homes rather than pay more staff to do person-to-person modifications and all the things that go with that: verification of income, negotiation, etc. This happens to be, in most cases, the mega-servicers who are owned by the big banks.

A critically important point are the political and financial relationship of these four subpoenaed Fannie Mae retained attorney firms, the state attorney general and Florida’s Republican Party supporters.

One might wonder whether other states have similar situations, where the foreclosure services firms are tightly entwined with the state’s Republican Party while preventing all efforts to change the number of foreclosures.