[Editor's Note: In the aftermath of the burst housing bubble, in the rush to foreclose upon million s of U.S. homeowners, big U.S. lenders resorted to apparently fraudulent strategies as part of an assembly-line repossession grab. Money Morning's Shah Gilani, a retired hedge-fund manager, warns investors about the possible fallout facing the U.S. financial system and provides detailed advice on the steps to take.]

What most Americans don't know about " Mortgagegate" is that "robo-signing" of foreclosure documents is the tip of the iceberg.

The breadth and depth of this newest mortgage crisis is so dangerous that the U.S. Federal Reserve last month pre-announced another potential round of quantitative easing (pundits are calling it "QE2") to address "potential negative shocks."

In fact, the fallout potential is so numbing and the actions that birthed it so scandalous that commentators have given the crisis the Watergate-esque title of " Mortgagegate" (or, as some prefer, "Mortgage Gate").

Here's what the news-story headlines aren't telling you.

Foreclosure Follies

The Fed can't admit that the potential shocks it's worried about have already materialized, because that would trigger the very panic the central bankers hope to avoid.

But the odds that a financial tsunami will result from Mortgagegate are building each day. If this storm strikes with its full fury , it could be the kind of credit-crisis aftershock that undermines the tentative handhold that the U.S. recovery is so desperately clinging to.

On the surface, the problem looks like foreclosures have been conducted based on improperly processed paperwork. That is a gross understatement.

Here's what's wrong. When a homeowner buys a property with a mortgage, the property title lists them as the rightful owner and their lender as the mortgage-holder. The named lender possesses an encumbrance on the title. If the homeowner doesn't pay his or her mortgage, the lender can rightfully repossess the property and sell it.

In order to take the home back, the lender must first foreclose on the property. The problem begins with the fact that lenders, in order to make trading mortgages between themselves easier so they can be packaged into mortgage-backed securities (MBS) pools and sold to investors, assign their rights on titles to a "nominee." (How that happens is the part of the story that news outlets aren't talking about and will both shock and sicken you).

To take homes back, lenders or mortgage services start by filing court documents in "judicial foreclosure states" (most states in the U.S. require foreclosures to be court-processed). Filings against homeowners must include signed affidavits attesting to the relevant facts and demonstrating the lender's legal status to foreclose. Affidavits must be notarized.

But here's what's been uncovered: The people who are signing the necessary documents on behalf of the lenders aren't even reviewing documents - which means there's absolutely no way they followed the pre scribed procedures. It turns out that signers are basically "rubber-stamping" legal documents.

In the case of IndyMac Bank FSB (since purchased by a private equity group and renamed OneWest Bank), The Wall Street Journal reported that Erica P. Johnson-Seck routinely signed as many as 6,000 documents a week. In another instance, employees of GMAC Home Mortgage and the mortgage unit of JPMorgan Chase & Co. (NYSE: JPM) admitted in sworn testimony that they each signed 10,000 documents per month, without properly reviewing and notarizing them.

Similar instances of what's become known as "robo-signing" are now coming to light in relation to hundreds of thousands of other documents. And by the time it's all said and done, it's likely that we'll be talking about millions of documents.

Fraud was clearly rampant in the notarization of documents that were part of the foreclosure process. The fact that document signers weren't reading and reviewing the paperwork, and weren't contacting homeowners - all of which was mandated by lenders - there clearly was no way that the proper due diligence was observed.

Questionable legal notarizations include pervasive findings that documents were notarized even before they were signed and dated. A notary is legally designated to verify the identity of the signer of a document and affix their notary stamp along with their signature that they have witnessed the signer executing the document, and that the signer is who they say they are.

Some notarizations on suspect documents are affixed by notaries that don't live or work anywhere near where documents were signed. Indeed, many of them live across state lines. That makes it highly unlikely that signers were verified or that the documents properly notarized by law.

Congress, in its inimitable way, was made aware of this problem. Legislators tried to solve the problem by ramming through - without debate (highly unusual, but they did it) - legislation that partly addressed some of the notary issues.

In a bill that was supposed to facilitate interstate commerce, our elected representatives made it legal for notarizations to be accepted across state lines. How high up is the knowledge of this crisis? Apparently pretty high. After all, it was none other than U.S. Sen. Patrick Leahy, D-V T, the chairman the Judiciary Committee, who on Sept. 27 rammed through the Interstate Recognition of Notarizations Act, the bill in question.

In case you miss the egregious irony of the timing of the bill, it came up for a vote only a couple of weeks after the initial disclosure in courts around the country that GMAC had robo-signers falsely notarize foreclosure documents. Last Thursday, U.S. President Barack Obama refused to sign