Don't underestimate foreclosure crisis, watchdog warns
Tuesday, November 16, 2010; 12:18 PM
A congressional oversight panel warned on Tuesday that a widespread problem of flawed and fraudulent foreclosure paperwork could upend the housing market and undermine the nation's financial stability. The report comes just as the issue is drawing greater scrutiny this week in Washington.
The report, issued by the Congressional Oversight Panel, which monitors the government's bailout program, marks the first time a federal watchdog has weighed in on the nationwide foreclosure mess.
The panel echoed concerns raised by consumer advocates and financial analysts who have said that although the consequences of the foreclosure debacle remain unclear, the problems could throw into doubt the ownership not only of foreclosed properties but also the millions of ordinary mortgages that were pooled and traded by investors around the world.
On Tuesday afternoon, the Senate Banking Committee will hold a hearing on the matter. Lawmakers are considering several legislative responses to the findings.
The spotlight on the foreclosure process has anxious financial executives mobilizing on Capitol Hill. A financial lobbyist said senior executives have been meeting with lawmakers and their staffers, and industry groups are planning letter campaigns aimed at preventing aggressive new legislation.
"Everyone's very nervous about what's going to happen this week," said another industry official, who spoke on condition of anonymity because his firm has a stake in the outcome. "We have all hands on deck."
It's unclear what new measure could pass in a politically divided Congress, but some ideas under consideration could broadly reshape the mortgage industry.
Some lawmakers want to resurrect legislation that would give bankruptcy judges the power to order lenders to reduce the principal that homeowners owe. Others are pushing for some big banks to spin off their mortgage-servicing arms to avoid conflicts of interest. There's also discussion of replacing the industry's current system for tracking mortgages with one that would be subject to federal regulation.
"The risk is small that a bill gets through," the financial lobbyist said, but "we are taking it very seriously."
Potentially high costs
The problems came to light this fall as firms such as Ally Financial, Bank of America and J.P. Morgan Chase halted foreclosures because of revelations about shoddy mortgage documentation and other questionable practices.