J.P. Morgan Chase to freeze foreclosures over flawed paperwork
Wednesday, September 29, 2010; 11:36 PM
J.P. Morgan Chase, one of the nation's leading banks, announced Wednesday that it will freeze foreclosures in about half the country because of flawed paperwork, a move that Wall Street analysts said will pressure the rest of the industry to follow suit.
The bank's decision will affect 56,000 borrowers in 23 states where allegations of forged documents and signatures and other similar problems are being used to try to overturn court-ordered evictions. Yet the impact may be much broader, given J.P. Morgan's stature in the industry. If other banks adopt the same approach, the foreclosure process in many parts of the country will grind to a halt.
Officials at Fitch Ratings, a credit-rating firm that measures the health of companies, said the "defects" found in foreclosure documents at J.P. Morgan are industry-wide. Underscoring that concern, Fitch said it is considering whether to lower the grades it gives to the mortgage servicing divisions of the nation's largest lenders.
"Over the next few weeks, we expect to see more and more companies come out with similar announcements," said Diane Pendley, a managing director at Fitch.
The paperwork problems at J.P. Morgan mirror those uncovered last week at another large mortgage lender, Ally Financial. But J.P. Morgan's decision is expected to have a much greater effect on the industry because it is held in high regard by its peers. By contrast, Ally, formerly known as GMAC, is still under the cloud of a $17 billion federal bailout package that it has been unable to pay back.
Both firms are investigating whether foreclosure files were improperly assembled, and whether their employees failed to review the documents even as they signed off on them. A growing number of homeowners - even those who missed their mortgage payments - are now scrambling to challenge the proceedings, weighing down an already overburdened court system.
J.P. Morgan had declined to address the matter until Wednesday. But in a sworn deposition, one of the bank's employees, Beth Ann Cottrell, admitted that she and her team signed off on about 18,000 foreclosures a month without checking whether they were justified.
J.P. Morgan spokesman Tom Kelly said Wednesday that the firm "does not expect to find any factual problems or that customers have been harmed, but if we do find any cases we will take appropriate action."
In addition to the measures that private lenders have taken, four states - California, Colorado, Connecticut and Illinois - have called for a moratorium on all foreclosures initiated by Ally, while attorneys general in seven other states have opened civil or criminal investigations related to flawed foreclosures.
Even as the extent of the problems has become more apparent, the Treasury Department has declined to answer specific questions about the matter since it surfaced last week.
On Wednesday, Treasury spokesman Mark Paustenbach said that officials have been in touch with Ally and that they expect it to take "prompt action to correct any errors." He added that the agency is "monitoring their progress."
Treasury officials raised the issue personally with Ally chief executive Michael Carpenter during a recent meeting, according to an administration official.
Yet the agency's response has frustrated some consumer advocates. A few lawmakers have also called for investigations of whether homeowners are being improperly removed from their homes.
Sen. Al Franken (D-Minn.) said Wednesday that the Treasury Department and relevant federal agencies should begin their own inquiry.
"With millions of families losing their homes, it's inexcusable for companies like Ally to be this patently negligent," he said. "I want the federal government to hold Ally accountable and ensure that homeowners who wrongly received foreclosure get the compensation they deserve."
Ira Rheingold, director of the National Association of Consumer Advocates, criticized the Treasury Department, saying it has not been forthcoming about what actions it is taking to the remedy the situation.
The agency has been "protecting servicers and investors and doing what is minimally possible to help homeowners," he said.
Other consumer advocates say administration officials face a no-win situation. If they determine there is no reason to take action, they may be criticized for not helping homeowners. But taking extreme measures such as calling for a national moratorium on foreclosures could hurt the economy and damage the housing market.
Mark Zandi, chief economist for Moodys.com, said that, in the worst-case scenario, the document-processing problems could lengthen the foreclosure process from three years to as long as a decade, especially if homeowners use the flawed paperwork to appeal their evictions.
The long holdup could have "macroeconomic consequences" as a destabilizing force on housing prices. Banks could become more unwilling to extend credit to households or to small-business owners who use homes as collateral. And investors who had been keeping home prices propped up by buying foreclosures may stop and never come back.
He added, however, that it is still an open question how the courts will handle the paperwork problems.
Ally officials on Wednesday declined to comment on any ongoing or potential investigations, but they have said that they are confident that "the processing errors did not result in any inappropriate foreclosures."
Company officials have declined to disclose how many loans may be affected and how much remedying the issue might cost, but spokeswoman Gina Proia said the firm "does not anticipate significant adverse effect on Ally related to this matter."