By Ariana Eunjung Cha, Steven Mufson and Jia Lynn Yang
Washington Post Staff Writers
Saturday, October 9, 2010; 10:23 AM
Senior Obama administration officials said Friday that a nationwide moratorium on foreclosure sales may be inevitable, despite their grave reservations about the impact a broad freeze would have on the nation's housing market and economic recovery.
Their remarks were made as pressure for a nationwide moratorium mounted Friday when Bank of America, the nation's largest bank, halted foreclosure sales in all 50 states. Senate Majority Leader Harry M. Reid (D-Nev.), who is locked in a tight reelection campaign, called on other major lenders to follow suit.
The White House has so far resisted joining the election-season calls for action but convened two interagency meetings this week to discuss reports that banks filed fraudulent documents to evict delinquent borrowers and to deal with questions about whether banks are seizing properties without having clear ownership of the mortgages.
One meeting was made up mostly of groups that regulate the housing industry, including the Department of Housing and Urban Development, the Treasury Department and the White House. The other, which involved the U.S. Securities and Exchange Commission, the Internal Revenue Service and U.S. attorneys from across the country, was focused on the question of whether financial fraud was committed.
With foreclosed properties comprising one in every four homes sold in the United States, the spreading moratorium could disrupt real estate deals in progress, slow down the process of clearing the backlog of troubled home loans and prolong the economic recovery, analysts said.
A freeze would also strike at the financial sector, just two years after it suffered one of the worst crises in its history. One government official who has been in discussions with several big financial firms said the banks are bracing themselves for a wave of lawsuits from homeowners who are fighting to keep their homes and from investors who had bought mortgage loans on Wall Street. On Friday, while the Dow Jones industrial average crossed 11,000, most major bank stocks fell.
Bank of America is the first bank to put a moratorium on foreclosures in all states, extending its suspension to states such as California and Nevada, which have been hit hardest by the housing bust. Previously, Bank of America, J.P. Morgan Chase and others had announced that they were stopping foreclosures only in the 23 states where a court order is needed for an eviction.
Industry sources said J.P. Morgan Chase, the nation's second largest bank, will expand its freeze to a handful of other states. PNC Financial Services has stopped some foreclosure proceedings, according to an industry lobbyist and a title insurance company. A PNC spokesman, Frederick Solomon, declined to comment on whether the lender was halting foreclosures. He said the bank was reviewing its procedures.
Speaking at the National Press Club, Bank of America chief executive Brian Moynihan played down the gravity of its moratorium and the impact of the paperwork flap. "We haven't found any foreclosure problems," he said. "What we're trying to do is clear the air and say we'll go back and check our work one more time."
A White House official said the administration is "very closely" monitoring the foreclosure issues and expects "lenders and servicers to follow the law and to fix any problems in their processes related to foreclosures."
Also Friday, the Federal Housing Administration said it had asked agency-approved mortgage servicers - which includes the nation's largest banks - to immediately audit their foreclosure operations. The FHA can impose financial penalties on companies that do not follow rules set by housing regulators.
Questions over the legal standing of banks in foreclosure proceedings as well as reports that these firms cut corners as they pushed foreclosures through the legal system fueled calls in Congress for a nationwide freeze and federal investigations.
Reid, who had earlier sent a letter to major banks asking them to suspend foreclosures in Nevada, expanded that call Friday after Bank of America's announcement.
"I thank Bank of America for doing the right thing by suspending actions on foreclosures while this investigation runs its course," he said.
The Senate banking committee's chairman, Christopher J. Dodd (D-Conn.), said Friday that his panel will hold hearings Nov. 16 to investigate the morass.
Rep. Edolphus Towns (D-N.Y.), chairman of the House Committee on Oversight and Government Reform, said the top 10 mortgage lenders should immediately suspend foreclosure proceedings in all states.
"The implications of ignoring the foreclosure problems are far too great to be ignored," he said Friday.
In addition to a national moratorium, some lawmakers are discussing reviving a bill that would give bankruptcy judges the power to modify loans and reduce principal to market value. The bill passed in the House but did not make it through the Senate.
As the House Financial Services Committee convened a foreclosure-fraud working group to begin discussing ideas for other legislative remedies, the banking industry began to fight back against the notion that the paperwork problem was more than a technicality.
The Mortgage Bankers of America and the Financial Services Roundtable circulated a letter Friday on Capitol Hill to "set the record straight." It said that banks are reviewing their foreclosure paperwork but that in nearly all cases, the foreclosures are justified.
Wells Fargo scheduled a briefing for key staffers on Wednesday to talk about issues.
"Calls for a blanket national moratorium on all foreclosures are a bad idea and would cause significant harm to communities at risk, the unstable housing market and the fragile economy," the industry letter said.
Suspending foreclosures could end up forcing banks, which act as service companies for the loans, to spend billions of dollars to compensate investors who own the pools of mortgages they manage. And it could add to the losses at Fannie Mae and Freddie Mac, the two government-owned mortgage financiers.
Pension funds and other investors in the pools of mortgage securities are worried that the big banks will get special treatment from Washington.
"What's happened is a gross mishandling of paperwork and often times a misrepresentation of the transaction," said Chris Katopis, a spokesman for the Association of Mortgage Investors. "The banks have to have some responsibility and accountability for this."
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