Regulators from all 50 states are launching a coordinated investigation into possibly "deceptive" and "unfair" foreclosure practices that may have illegally evicted families from their homes.
A bipartisan group of state attorneys general from 49 states and financial regulators from 39 states will work together to comb through foreclosure filings and documents from mortgage servicers to see if any state laws have been broken in the rush by services to kick borrowers out of their homes without following various state and local laws.
Homeowners, homeowner advocates and various state officials have complained that mortgage servicers have failed to follow basic procedures, like reviewing documents, properly signing them and other tasks long followed prior to the mortgage securitization boom that took off this decade.
Some of the nation's largest servicers have already declared temporary moratoriums on foreclosure proceedings in order to check on their own processes. Bank of America stopped all of their foreclosures, as did Ally Financial. Other servicers imposed temporary stoppages in the 23 states that require foreclosures to go through a court of law.
"At a time when we need to be doing everything that we can to avoid preventable foreclosures and keep families in their homes, it is incredibly irresponsible that some servicers are not doing the bare minimum of following existing laws and properly verifying foreclosure documents," Richard H. Neiman, New York's top bank regulator and a member of the Congressional Oversight Panel, a federal bailout watchdog, said in a statement Wednesday. Neiman is requiring that more than 20 mortgage servicers registered to do business in New York conduct internal reviews of their foreclosure practices and suspend foreclosure actions until that review is completed.
"In recent days, it has become apparent that a number of mortgage loan servicers have submitted affidavits or other foreclosure documents that appear to have procedural defects," the Conference of State Bank Supervisors said in a statement. "In addition, many affidavits may have been signed without a notary public being present.
"The multistate working group believes such practices may constitute a deceptive and unfair practice in violation of state laws, and this group has already begun to work directly with mortgage loan servicers to determine whether any such violations have occurred," the Washington-based coalition of state bank regulators said.
Attorneys general from 49 states said in a joint statement that "the facts uncovered in our review will dictate the scope of our inquiry."
If they find systemic abuse -- which many experts say is a given in the current market due to the lack of investment by servicers and their desire to service mortgages on the cheap -- that inquiry may broaden to include an examination of even loan-level documents. Such a time-consuming investigation will likely lead to significant costs being borne by the nation's largest servicers, which also happen to be the nation's largest banks.
Bank of America, Wells Fargo, JPMorgan Chase, and Citigroup together service more than $6 trillion in home mortgages, or about 60 percent of the entire $10.6 trillion residential mortgage market, according to figures as of June 30 from the Federal Reserve and MortgageStats.com. Ally, a firm majority-owned by taxpayers and formerly known as GMAC, services about $400 billion in home mortgages, data show.
JPMorgan admitted Wednesday that it has identified situations where employees or contractors didn't follow the law when processing foreclosures. The nation's second-biggest bank by assets said it is reviewing about 115,000 mortgages that are in the foreclosure process, it said. However, like other firms, the bank maintains that "underlying foreclosure decisions were justified by the facts and circumstances."
State officials aren't so sure.
"This announcement illustrates states' ability to coordinate our efforts to protect consumers," said John Ryan, executive vice president at CSBS. "The foreclosure process in the various states is designed to ensure a basic level of due diligence and accountability occurs before taking an action that has dramatic implications for homeowners and communities.
"Our priority is to ascertain if violations of state law occurred, to re-establish confidence in the integrity of the foreclosure process, and take appropriate action to protect the rights of consumers and homeowners affected."
In an Oct. 4 letter to U.S. Attorney General Eric Holder, Federal Reserve Chairman Ben Bernanke and Acting Comptroller of the Currency John Walsh, House Speaker Nancy Pelosi (D-Calif.) and her fellow California Democrats in the House wrote that recent reports of unwarranted foreclosures "only amplify our concerns that systemic problems exist in the ways many financial institutions have dealt with homeowners who are seeking to avoid foreclosures."
Foreclosures are a matter of state law. If state investigators find the problems to be systemic, the nation's largest banks could face a crisis rivaling that of September 2008 when the financial system was rocked by the failure of Lehman Brothers, the government takeover of Fannie Mae and Freddie Mac and the forced marriage of Bank of America and Merrill Lynch, some analysts say.