All 50 US states launched a joint investigation of the mortgage industry on Wednesday, a move some experts fear will cause uncertainty and threaten the recovery of the fragile housing market. The state attorneys general are looking at allegations some banks used shoddy or fraudulent paperwork to remove struggling borrowers from their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.
-- J.P. Morgan says comfortable with foreclosure procedures
"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney General Lori Swanson said in a statement. "The latest allegations of corner cutting and slipshod paperwork are troubling, but perhaps not surprising."
Industry experts warn the investigation could put the brakes on foreclosure proceedings. One of every four homes sold in the second quarter was a foreclosed property and any slowing could have an impact on the broader economy, as the housing market traditionally drives recoveries after a downturn.
The United States has an $11 trillion residential mortgage market. Barclays Capital analysts said if banks were able to show that the bulk of the foreclosures were handled properly then the impact on their results would be minimal. But it could take some time before a full picture emerges, they said.
The controversy has refocused attention on the foreclosure crisis just weeks before the November 2 congressional election in which Democrats look likely to suffer major losses due to voter unhappiness over President Barack Obama's economic policies. The states are investigating the use of "robo-signers" - people who sign hundreds of affidavits a day - by banks and companies that collect monthly mortgage payments. It is alleged they did not properly review the documents they were signing.
Using robo-signers "may constitute a deceptive act and/or an unfair practice or otherwise violate state laws," the attorneys general said in their joint statement. The investigation aims to put an immediate stop to improper procedures and establish a mechanism "for more effective independent monitoring of future mortgage foreclosure practices," Ohio Attorney General Richard Cordray said. J.P. Morgan Chase, the second-largest US bank, said on Wednesday it had identified some issues in its review of foreclosure affidavits but was "pretty comfortable" that its decisions to foreclose had been proper.
J.P. Morgan, which posted higher-than-expected profits on Wednesday, is among three big mortgage servicers to announce a halt to some foreclosures pending reviews. Bank of America Corp, the largest US mortgage servicer, has temporarily halted evictions nation-wide. Other lenders have declared more limited suspensions or left their foreclosure policies in place.
Analysts at Citi said investors did not appear too fazed about the questions being raised about banks' paperwork. The KBW Banks Index was up 0.1 percent in afternoon trading on Wednesday, underperforming a 1 percent rise in the broader stock market. Banks are anxious to resolve the issue as soon as possible. Some real estate agents are already reporting that potential buyers are worried about buying bank-owned homes whose provenance could later be called into question. The paperwork furor also comes at a bad time for banks still trying to burnish their tarnished images after the financial crisis, which was fuelled in part by excessive risk-taking on Wall Street.
It invites further scrutiny at a time when federal regulators are writing new rules for the financial industry aimed at preventing such practices in future. Some prominent Democratic lawmakers have called for a nation-wide moratorium on foreclosures while servicers and regulators review potential paperwork problems. The White House, caught between wanting to make sure banks act properly and not wanting to take any action that could hurt a weak housing market, rebuffed those calls on Tuesday, saying a broader moratorium could have "unintended consequences." But White House spokesman Robert Gibbs said the Obama administration supports the investigation by the attorneys general.
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