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Pelosi, lawmakers call for federal probe on mortgage lenders

By Brady Dennis and Ariana Eunjung Cha
Wednesday, October 6, 2010; 12:21 AM

House Speaker Nancy Pelosi called on the Justice Department to investigate the nation's largest mortgage lenders on Tuesday, and Maryland joined a growing list of states seeking to halt foreclosures while they probe claims of fraudulent filings.

In a letter to U.S. Attorney General Eric H. Holder Jr., Pelosi and dozens of other Democrats accused the nation's biggest banks of making it difficult for struggling borrowers to get foreclosure relief while the firms routinely evicted them with flawed court papers.

The group said that recent reports of lenders initiating hundreds of thousands of questionable foreclosures "amplify our concerns that systemic problems exist."

The request from Democrats puts pressure on the Obama administration to get more involved on a matter that it so far has said little about publicly. The move is also likely to stoke cries for a broad moratorium on foreclosures across the country.

On Tuesday, the AFL-CIO joined other consumer groups that have called for such an action. Foreclosures across the nation could grind to a halt anyway as more states freeze the process.

Real estate analysts, however, warned that the moratoriums could overwhelm the court system and wreak havoc on the fragile housing market by scaring away potential buyers of foreclosed properties.

The problems now tainting hundreds of thousands of foreclosures came to light last month when Ally Financial - the recipient of a $17 billion federal bailout - suspended evictions in 23 states where a court order is required to seize a property.

Other lenders soon followed suit, acknowledging problems with foreclosure filings, including potentially forged documents and the practice of employing "robo-signers" who signed off on thousands of evictions every month without verifying their accuracy. Flawed paperwork also has shown up in the 27 states, including Virginia and Maryland, where lenders can foreclose without a judge's consent.

Those revelations have triggered a chain of reactions. State officials moved to halt foreclosures. Emboldened attorneys for homeowners are ramping up new court challenges. Some judges have said they will reopen foreclosure cases that were rubber-stamped.

Texas this week became the latest state to issue an industry-wide moratorium on foreclosures and demanded that mortgage companies identify employees who improperly signed off on foreclosures documents.

In a letter to the 27 companies that service mortgage loans in the state, Texas Attorney General Greg Abbott requested information on all foreclosures in which an affidavit that was "robosigned" was used. The state's moratorium will be in place until at least Oct. 15, the deadline Abbot gave for a response.

Connecticut issued a similar freeze on all foreclosures last week. California banned foreclosures by J.P. Morgan and Ally, while Colorado stopped foreclosures by Ally.

Attorneys general in a number of other states, including Iowa, Ohio, Massachusetts and North Carolina, have either opened formal probes or demanded information from mortgage lenders.

Meanwhile, Maryland Gov. Martin O'Malley joined the state's attorney general and Rep. Elijah E. Cummings (D-Md.) this week in asking mortgage servicers to voluntarily halt foreclosure proceedings in the state.

O'Malley said in statement that companies that improperly prepared affidavits in foreclosure cases are "trampling laws that were designed specifically to protect homeowners in default."

Several Maryland real estate agents who handle the sale of foreclosures for the banks said they are waiting nervously to see whether the housing market will be affected by the move.

The entreaty from Pelosi and other Democrats to the Justice Department and federal banking regulators on Tuesday - which a Justice spokeswoman said the agency was reviewing - represents one of several recent calls for further investigations into mishandled and fraudulent foreclosure filings.

Democratic senators Robert Menendez (N.J.) and Al Franken (Minn.) on Tuesday wrote to the Government Accountability Office to request an investigation into "the role of all government entities, including federal regulators, involved in overseeing mortgage servicing companies and affiliated banks, identify any regulatory problems that may have permitted this misconduct to occur without detection until now."

Menendez, who leads a subcomittee that deals with housing issues, separately sent letters to GMAC, J.P. Morgan Chase, Bank of America and dozens of mortgage servicing companies, demanding to know what they are doing to detect troubled paperwork and rectify any problems.

A Treasury spokesman Tuesday said the agency had asked Ally's management to look into the matters, adding that "formal investigations are best done by independent, third-party regulators."

The escalating inquiries around the country have raised the specter of a nationwide moratorium on foreclosures if the list of current problems continues to deepen.

Guy Cecala, publisher of Inside Mortgage Finance, said such a move would "delay significantly any recovery of the housing market."

He said that millions of homes are in limbo, with borrowers in default or foreclosure. Until those wind their way through the system, Cecala said, "we can't talk about home prices stabilizing and returning to anything approaching normal market conditions."

Temporary halts in foreclosures have come periodically in the wake of the financial crisis. Many lenders imposed moratoriums soon after the federal government launched a foreclosure prevention effort, as they waited to examine the details of that plan. Many lenders also regularly halt foreclosures between Thanksgiving and early January to avoid evicting homeowners during the holidays.

But given the recent revelations about faulty and forged filings and the pressure on federal regulators, judges and lenders to dig deeper into the problem, this time could play out differently.

"Right now, there's no question we're headed into a moratorium period. The question is: Will it be three months or six months or a year?" he said. "I think a lot of people are trying to put a positive spin on this and say: 'How can it be necessarily bad delaying foreclosures?' But unless we can change the outcome, I can't imagine any positive that can come out of all this."

Staff writer Dina ElBoghdady contributed to this report.

dennisb@washpost.com chaa@washpost.com

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