Gary Trafford
Gerri Sheppard

See these pictures? Those are the first people indicted for the fraud in the mortgage mess, Gary Trafford and Gerri Sheppard.

Yesterday, Nevada Attorney General Catherine Cortez Masto threw the book at these people, with 606 felony and gross misdemeanor charges for supervising the “robo-signing” of documents to speed forecloses on Nevada residences. (You can read the full indictment here.)

”The grand jury found probable cause that there was a robo-signing scheme which resulted in the filing of tens of thousands of fraudulent documents with the Clark County Recorder’s Office between 2005 and 2008,”said Chief Deputy Attorney General John Kelleher. The indictment alleges that both defendants directed the fraudulent notarization and filing of documents which were used to initiate foreclosure on local homeowners.

These are mid-level employees for a company called Lender Processing Services, a medium size company with over 8000 employees. But it’s not a bank. It’s not Goldman Sachs or JP Morgan. So why is this so important? Because LPS is a contractor to banks, and it handled a good chunk of the foreclosures around the country. If your mortgage goes into default, there’s a good chance that your servicer would hand over your file to LPS, who would then initiate foreclosure proceedings. That these people are charged with forging paperwork suggests that the foreclosures themselves might not be legal, and that the banks may not actually have originated the mortgages properly. After all, why not just do the paperwork properly if you have the right to foreclose?

The idea here is that Trafford and Sheppard flip on their superiors, in return for lenient sentences. This is how you get up the chain of command to find out how far the fraud went. It’s also how you clarify the sequence of events, with input from the ground troops that were ordered to commit the acts.

And if it’s the case that these mortgages were problematic in the first place, then the problem hits Wall Street squarely. It flows back into the bundling of mortgage-backed securities, because it means investors were sold bundles of bad mortgages. This could unwind the whole rotten chain of events going back down the housing bubble.

That’s the theory, anyway. For now, it’s mug shots and 606 felony and misdemeanor charges against two mid-level employees who helped foreclose on a lot of families.