Foreclosure Mess: 50 States Investigate Mortgage-Services Industry

U.S. housing market remains uncertain as states probe corrupt paperwork.

October 12, 2010, 6:40 PM

Oct. 13, 2010— -- The attorneys general of all 50 states Wednesday announced an investigation into whether sloppiness or deceit led to the latest episode of the national foreclosure drama, further threatening the recovery of the U.S. housing market.

"This is not a silver bullet to keep millions of Americans in their homes," said Iowa Attorney General Tom Miller, who's heading the bipartisan investigation. "This is a chance to right the law and get the process right, a chance to have some extra time ... and maybe a chance to do some modifications."

Statements from Miller and other state investigators said the initial focus will be on whether industry employees -- so-called "robo-signers" -- signed off on thousands of foreclosures every month without reviewing the files as legally required.

"Robo-signing is the one [problem] ... we're most concerned about," Miller told reporters late Wednesday, but he added, "We're not ruling out other issues."

The immediate goals of the investigation appear to be a halt of improper foreclosures and a review the past and present mortgage service practices, investigators said.

"We want this to never happen again," Miller said. "We will try to do this as quickly as possible."

In courts throughout the nation, homeowner attorneys have alleged that lenders forged signatures and improperly notarized documents in the rush to foreclose on homeowners.

"Banks blatantly broke the law, papering the courts with defective documents to railroad consumers into fast, possibly fraudulent foreclosures," Connecticut Attorney General Richard Blumenthal said in a statement. "At the best, banks engaged in careless negligence, at worst, outright fraud."

Such practices might have violated laws against unfair and deceptive trade practices, which could result in civil penalties, according to investigators.

"This is the clearest signal yet to the major mortgage lenders and servicers that they need to take serious measures to fix problems with affidavits," said Ohio Attorney General Richard Cordray, who recently filed the nation's first lawsuit against a mortgage servicer over allegedly fraudulent affidavits.

"What we have seen are not mere technicalities, as some suggest," Cordray said. "Rather, this is about the private property rights of homeowners facing foreclosure and the integrity of our court system, which cannot enter judgments based on fraudulent evidence."

The joint investigation into the practices of the booming mortgage-servicing industry could pressure financial institutions to rewrite a sea of corrupt paperwork.

Previous calls for a nationwide foreclosure moratorium had industry insiders worried but the states stopped short of requesting such a measure.

"The worst thing anybody could do right now is impose a lengthy moratorium on foreclosures, particularly if it results in people not being able to sell properties that have already been foreclosed on," said Rick Sharga, vice president of the real estate data firm RealtyTrac. "Right now, foreclosure properties represent about 30 percent of all home sales, and to take 30 percent of sales out of the housing market at a time when it's already unstable could have pretty disastrous results."

The Obama administration Monday rejected calls for a nationwide moratorium on foreclosures amid growing concerns about the market's recovery.

A moratorium would help families on the verge of losing their homes, but Sharga and other industry experts said it would lead to a backlog of homes on the market and further depress prices.

Even with tight lending standards, the nation is on pace to sell 4 million properties by the end of the year. That's way down from the peak of the housing boom when over 6 million were sold annually, however.

"The housing market is trying to recover ... but right now these technical delays are causing additional uncertainly," said Lawrence Yun, chief economist for the National Association of Realtors. "Some potential buyers may not want to enter the market now. And that will hold back the recovery time."

In recent weeks, major lenders such as JPMorgan Chase, Ally Financial's GMAC Mortgage unit and Bank of America have conceded that paperwork supporting an unknown number of foreclosures contain errors ranging from wrong dates to forged or inconsistent signatures. In some instances, mortgage company employees signed foreclosure documents without first verifying the information in them.

In response, the banks have suspended tens of thousands of pending foreclosures. Bank of America, for example, has suspended all its foreclosures in 23 states.

"A blanket moratorium would really hold back that natural recovery in the housing market," Yun said. "We know there are distressed properties and if there are ready buyers, that is the healing process. But if that healing process is prevented from happening, it will take longer for the market to recover."

What's unclear is how long it will take for the industry to clean up the mess.

Bruce Marks, founder and CEO of the National Association of Consumer Advocates, said the latest controversy could be good for the housing market.

"There's no lending going on out there," he said. "There's really this false assumption that says if you foreclose on something, there's going to be someone there to replace that foreclosed-on homeowner. That's not happening."

Around the country, meanwhile, the freeze on foreclosures has widened.

JPMorgan Chase announced that was expanding a review of foreclosure paperwork to include some states that don't require a court approval to foreclose. Chase will examine foreclosure documents in more than a handful of states besides the 23 that require judicial approval for a foreclosure, expanding on its earlier review of 56,000 foreclosures.

JP Morgan Chase also said the bank has stopped using the electronic mortgage tracking system, which lawyers for people losing their homes have argued is unable to accurately prove ownership of mortgages. The Mortgage Electronic Registration System, or MERS, serves as a trading house for millions of mortgages but critics say the systems lacks the required paper trail to prove mortgage ownership.

PNC Financial also said Tuesday that it was reviewing its mortgage servicing procedures, which includes foreclosures. GMAC Mortgage on Tuesday said it hired legal and accounting firms to conduct independent reviews of its foreclosure procedures in each of the 50 states.

"It's a market that pretty much is in critical condition right now," Sharga said.

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