Feds Escalate Investigations of Foreclosure Practices

(Oct. 25) -- The multiple federal agencies investigating questionable foreclosure practices at the nation's largest mortgage servicers have banded together and plan to announce their preliminary findings in November.

The news, announced by Federal Reserve Chairman Ben Bernanke today, came amid nascent signs of stabilization in the housing market, where persistent weakness has continued to undermine the economic recovery. A halt in the wave of foreclosures has threatened to freeze home sales as officials try to verify the ownership of foreclosed homes.

"We are looking intensively at the firms' policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bernanke said today at a conference on foreclosures and housing finance held by the Fed and the Federal Deposit Insurance Corp. in Arlington, Va. "We have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions."

Since revelations emerged this fall about the use of so-called robo-signers -- employees whose only job was to sign foreclosure papers without reading them -- and other problems in banks' procedures, probes were launched by the Justice Department, the FDIC, the Federal Housing Administration and the Fed.

Authorities in all 50 states are also looking into the matter, and several of the largest U.S. banks suspended some or all of their foreclosure proceedings as they launched their own inquiries into allegations of missing paper work and a lack of due process.

"The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgage servicing operations ... and anticipate preliminary results of the review next month," Bernanke said. "In addition, Federal Reserve staff members and their counterparts at other federal agencies are evaluating the potential effects of these problems on the real estate market and financial institutions."

Bank of America, now the largest mortgage player in the industry, said last week that it would resume foreclosures but acknowledged today that it had discovered some errors in its initial re-examination of foreclosure cases.

Also addressing the conference, FDIC Chair Sheila Bair said her agency's inquiry suggested that "legal documents required for foreclosures have in some cases been improperly exercised or robo-signed by mortgage servicers," but that FDIC-supervised state banks have limited exposure to the situation.

"I fear that the litigation generated by this issue could ultimately be very damaging to our housing markets, if it ends up prolonging those foreclosures that are necessary and justified," Bair added. "The regrettable truth is that many of the properties currently in the foreclosure process are either vacant or occupied by borrowers who simply cannot make even a significantly reduced payment and have been in arrears for an extended period of time."

The National Association of Realtors today said sales of existing single-family homes rose in September for the third straight month but remain at depressed levels.

Existing home sales last month were up 10 percent from August, the NAR said, but they're still down nearly 20 percent from September 2009, when first-time buyers were racing to meet the first deadline for a tax credit that came into force last November.

The NAR described the current situation as the early stages of a recovery but one threatened by the foreclosure mess.

"A housing recovery is taking place but will be choppy at times depending on the duration and impact of a foreclosure moratorium," chief NAR economist Lawrence Yun said. "But the overall direction should be a gradual rising trend in home sales with buyers responding to historically low mortgage interest rates and very favorable affordability conditions."