Mortgage Foreclosure Mess Could Lead to Bigger Financial Problems

The <"">mortgage foreclosure fiasco could have potentially disastrous consequences for the financial system, a new government report says. According to the Congressional Oversight Panel, if the foreclosure mess is found to be widespread, it could cost banks billions and create even more havoc in an already-struggling housing market.

Last month, several home loan lenders, including JP Morgan Chase, Bank of America and GMAC Mortgage, suspended various aspects of the foreclosure process after discovering irregularities in the preparation of court documents. In many instances, the banks outsourced foreclosure processing to “foreclosure factories,” which processed tens of thousands of court documents every month. It now turns out that the foreclosure affidavits processed by those companies were signed by personnel who came to be known as “robo-signers.” In many cases, the robo-signers were not reading or verifying documents where they were signed, and in many documents were not properly notarized.

The banks’ disclosures have prompted multiple investigations, including one by attorneys general in all 50 states. Those investigations could uncover criminal misconduct or large-scale errors that force foreclosures to be put on hold for an extended period of time. That will encourage thousands of people whose homes have been seized or are facing foreclosure to mount legal action against the banks.

“If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe. Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse,” the Congressional Oversight Panel said in a report released today.

The oversight panel was created by Congress to oversee the US Treasury Department’s $700 billion rescue program that came in at the peak of the financial crisis in the fall of 2008.

Previously, the US Treasury Department had said that mortgage foreclosure problems did not pose a threat to the financial system, but the Congressional Oversight Panel called such an assessment “premature.”

According to an ABC News report, the panel said banks could face “significant harm” if the validity of 33 million loans is called into question. If an investor in a mortgage-backed security were to force a bank to repurchase a loan because the firm had misrepresented the quality of that loan, the problems could be severe. Under such a scenario, an investor action could force Bank of America to repurchase and absorb partial losses on up to $47 billion in bad loans, the panel said.

The panel is urging the Obama administration to “explain why it sees no danger” to the $6.4 trillion market, and called for banking regulators to conduct another round of stress tests to see how banks could overcome “a potential crisis.”

In response to the panel’s findings, the Treasury Department issued a statement which said the following:

“We strongly believe that the reported behavior within the mortgage-servicer industry is simply unacceptable, and servicers who have failed to follow the law must be held accountable. That’s why the administration has led a coordinated interagency effort to investigate misconduct, protect homeowners and mitigate any long-term effects on the housing market.”

If you have believe that you were the victim of a wrongful foreclosure, legal help is available at <"">

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