By Ariana Eunjung Cha
Washington Post Staff Writer
Thursday, November 18, 2010; 8:31 PM
Members of Congress criticized federal regulators for failing to recognize problems with the nation's foreclosure system before they were brought to light by media reports, and they called for an examination into whether these issues present a systemic risk to the financial system.
Rep. Maxine Waters (D-Calif.) during a House subcommittee hearing said that a newly created group of senior financial regulators, known as the Financial Stability Oversight Council, should assess the potential impact on the broader economy.
"Why is it you don't know how these systems work that you regulate? That's the big question among members on both sides of the aisle," Waters said.
The acting director for the Office of the Comptroller of the Currency, John Walsh, defended his agency, saying its attention "was focused on the modification process." His teams were not present in rooms when the final paperwork for foreclosures was being prepared, he explained.
The four major federal regulatory agencies that oversee banks are conducting a review that includes on-site visits and reviews of individual foreclosure files. Officials are also evaluating the potential macroeconomic effects of foreclosure problems.
"These lapses are unacceptable, and we are taking aggressive actions to hold national banks accountable, and to get these problems fixed," Walsh said.
Republicans expressed frustration at the regulators' response, as well.
Rep. Spencer Bachus (R-Ala.), who is likely to be tapped as the next chairman of the House Financial Services Committee, said he did not understand how regulators missed the foreclosure problems, as they have on-site teams at many banks.
"Regulators were in some of those banks looking. I wonder why [the problems] were not visible," he said, adding, "I'm glad you read the newspapers."
Meanwhile, outgoing Financial Services Committee Chairman Rep. Barney Frank (D-Mass.) called for bipartisan support for legislation that would ensure another foreclosure "mess" does not happen again. But he said homeowners should not expect to get their homes back if they missed payments.
Borrowers should not have "false hopes that this is going to lead to a substantial number of foreclosures being permanently forgotten," Frank said.
Also at the hearing Thursday, Citigroup, which had claimed that its process for preparing foreclosure cases was sound, revealed that it is reviewing about 14,000 documents, including 4,000 that may have been notarized improperly.
A Bank of America representative said the bank would reform its foreclosure process, explaining it would no longer foreclose on homeowners while negotiating modifications on their loans at the same time. The bank completed 25,000 modifications in October, 50 percent more than the previous month.
"There are areas where we clearly must improve, and we are committed to making needed changes," said Rebecca Mairone, a mortgage servicing executive with Bank of America Home Loans.