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Wall Street Journal: U.S. Probe Criticizes Handling of Loans

October 20, 2010
In The News


A four-month-long Obama administration probe into five of the country's largest mortgage servicers has discovered "a significant variation" among their operations, with some servicers "significantly worse than others" in how they handle home loans, U.S. Secretary of Housing and Urban Development Shaun Donovan said in an interview.

Mr. Donovan wouldn't identify which companies were laggards in the HUD review, but he said the administration plans to make the results of its investigation public in the next few weeks.

The White House's Financial Fraud Enforcement Task Force, which includes the Justice Department, is at the early stages of investigating the way mortgage companies handled their documents. Tuesday, Securities and Exchange Commission Chairman Mary Schapiro confirmed her agency is looking into related disclosure issues. The White House has tried to hold meetings to coordinate the government's response, but probes appear to vary in pace and intensity.

The scrutiny was prompted by allegations mortgage-company employees signed hundreds of documents a day without verifying the underlying information, but has since broadened into a general examination of how banks handle mortgages and foreclosures.

The investigations have reignited criticism of Wall Street at a time when several of the country's top financial firms appeared to be on more solid ground, reporting strong third-quarter earnings. Bankers have said many of the servicing issues were technical in nature and didn't lead to unwarranted foreclosures. But the growing number of probes could put pressure on them to reach a settlement.

"If banks are going to resolve it and settle these matters, it'll be difficult to get everybody in the same room," said Ronald Glancz, a partner at law firm Venable LLP, who represents banks. "You are never going to get a global settlement, which is what the banks will want, unless you can get all the investigators in the room. This just drags it out and prolongs the agony."

Fifty state attorneys general have launched a joint investigation into allegations that banks mishandled foreclosure documents known as affidavits. In addition to the SEC and Justice Department, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, has demanded reviews at top banks, as has the Office of the U.S. Comptroller of the Currency. SEC Chairman Mary Schapiro said Tuesday her agency is looking into "issues with respect to disclosure, misrepresentations or omissions."

Mr. Donovan said the issues discovered by his agency's review go beyond the technicalities of foreclosures.

"The issues that we've seen around the affidavit process are potentially symptomatic of problems in other parts of the process as well, and we want to make sure that we are reviewing more broadly" how the industry operates, he said.

The uproar over improper affidavits, which has led some banks to suspend foreclosures, underscores the awkward relationship between the Obama administration and the banks. The administration wants banks to correct mistakes and is opposing calls for a blanket moratorium on foreclosures. But if it appears to go easy on banks, it will face criticism from the left—and could trigger legislation the administration fears could prolong the housing crisis.

On Tuesday, Rep. Maxine Waters (D., Calif.) blasted Bank of America Corp. and GMAC Mortgage, a unit of Ally Financial Inc., for their plans to resume foreclosures. "Regulators need to initiate a full review of [these companies] and other servicers because we cannot leave it to the banks to review and police themselves," Ms. Waters said.

Mortgage servicers play a key role in the way banks interact with borrowers. They collect money, help modify loans and ultimately handle foreclosures. As the number of foreclosures skyrocketed in recent years, servicers faced growing pressure to help borrowers rework mortgages that had slipped into default.

The HUD-led probe focuses on companies that service large numbers of loans guaranteed by HUD's Federal Housing Administration, including Bank of America, J.P. Morgan Chase & Co. and Citigroup Inc. HUD has the authority to fine or sanction banks.

A spokesman for Citigroup said the company "will defer to Secretary Donovan for any expansion on his comments." A representative for J.P. Morgan declined to comment, and a representative for Bank of America didn't return calls for comment.

Bank of America officials said they decided to file new foreclosure documents in 23 states and resume certain foreclosure sales after a company review didn't uncover any errors in their procedures.

Ally officials have said they are resuming foreclosures in cases where they have reviewed documents processed by "robo signers" and have resubmitted documents with new signatures.

U.S. officials have emphasized they will demand changes from banks if evidence is uncovered suggesting any homeowners were wrongly evicted.

"Nobody should lose their home through a mistake," Mr. Donovan, of HUD, said. "Even if it's one person, it's shameful....No matter how widespread it is, it's wrong."

Responding to suggestions that flaws in foreclosure affidavits point to a broader problem that could taint the legal underpinnings of all sorts of mortgages and mortgage-backed securities, Mr. Donovan said he has seen no evidence so far of "underlying structural flaws that would call into question our broader mortgage system."

Mr. Donovan and other administration officials were scheduled to meet at the White House on Tuesday to review the investigations and other responses. On Wednesday, he is convening the latest in a series of meetings of regulators and other officials involved.

—Evan Perez and Kara Scannell contributed to this article.