Foreclosure documents scandal could threaten big banks, hurt US
homeowner program, report says
The disarray stemming from flawed foreclosure documents could
threaten major banks with billions of dollars in losses, deepen the
disruption in the housing market and hurt the government's effort
to keep people in their homes, according to a new report from a
Revelations that several big mortgage issuers sped through
thousands of home foreclosures without properly checking paperwork
already has raised alarm in Washington. If the irregularities are
widespread, the consequences could be severe, the Congressional
Oversight Panel said in a report issued Tuesday. The full impact is
still is unclear, the report cautions.
Employees or contractors of several major banks have testified in
court cases that they signed, and in some cases backdated,
thousands of certifying documents for home seizures. Financial
firms that service a total $6.4 trillion in mortgages are involved,
according to the new report. Big banks including Bank of America
Corp., JPMorgan Chase & Co. and Ally Financial Inc.'s GMAC
Mortgage have suspended foreclosures at some point because of
Federal and state regulators, including the Federal Reserve and
attorneys general in all 50 states, are investigating whether
mortgage companies cut corners on their own procedures when they
moved to foreclose on people's homes.
"Clear and uncontested property rights are the foundation of the
housing market," the report says. "If these rights fall into
question, that foundation could collapse."
It lays out the possible scenarios: Borrowers may not be able to
ascertain if they're sending their mortgage payments to the right
party. Judges may block all foreclosures. Prospective buyers and
sellers could be in left in limbo.
For major banks, if they discovered that they still owned millions
of bad mortgage loans they assumed had been sold, the losses could
"Serious threats remain that have the potential to damage financial
stability," Sen. Ted Kaufman, D-Del., the watchdog panel's
chairman, said in a conference call with reporters on Monday. "This
is an incredibly complex problem. . It could turn out to be
nothing. It could turn out to be a big deal."
The Treasury Department's foreclosure prevention program could be
crimped if mortgage companies taking part in it find their legal
right to begin foreclosure proceedings is challenged, affecting
their ability to modify home loans. Treasury should actively
monitor the effect of the so-called "robo-signing" controversy on
the program, the report urges.
Despite the problems, the Obama administration has maintained there
is no need to halt foreclosures in all 50 states.
Treasury officials say a review has been undertaken of the
procedures for certifying documents for foreclosures of the 10
biggest mortgage companies participating in the program.
"We strongly believe that the reported behavior within the mortgage
servicer industry is simply unacceptable, and (companies that) have
failed to follow the law must be held accountable," Treasury
spokesman Mark Paustenbach said in a statement. Treasury, various
regulators, the Justice Department and the Department of Housing
and Urban Development are investigating, "and we will continue to
monitor the situation closely," Paustenbach said.
Phyllis Caldwell, who heads the department's homeownership
preservation office, last month told a hearing by the oversight
panel that so far no evidence has emerged of risk to the financial
system from the documents scandal -- or from efforts by mortgage
investors to force banks to buy back problem loans because of
alleged misrepresentations of their risk.
That brought protests from some members of the panel, such as Damon
Silvers, policy director for the AFL-CIO labor federation, who told
Caldwell: "It is not a plausible position that there is no systemic
risk here." The report says the position appears "premature."
"Treasury should explain why it sees no danger" and regulators
should subject Wall Street banks to new stress tests to gauge their
ability to deal with a potential crisis, the report states.
In legal moves by mortgage investors against banks, one action
alone could seek to force Bank of America to buy back and take
partial losses on as much as $47 billion in soured loans, the
The oversight panel was created by Congress to oversee the
Treasury's $700 billion rescue program that came in at the peak of
the financial crisis in the fall of 2008. Of the total, $75 billion
was earmarked for mortgage assistance programs.