Foreclosure process 'must be fixed,' Treasury official says
Tuesday, November 23, 2010; 10:18 PM
A top Treasury Department official said Tuesday that federal investigators looking into problems with mortgage foreclosures throughout the country have found widespread and "inexcusable" breakdowns in basic controls in the foreclosure process.
"These problems must be fixed," Assistant Treasury Secretary Michael Barr told members of the Financial Stability Oversight Council, the newly formed panel of regulators responsible for identifying potential risks to the financial system.
The extensive foreclosure problems - which range from flawed and fraudulent paperwork to questions about improper or incomplete loan transfers - first surfaced in September when large firms such as Bank of America and Ally Financial abruptly halted foreclosures.
In the wake of those revelations, lawmakers and regulators have struggled to determine the depth of the problems, as well as the potential fallout. Officials this fall formed a federal foreclosure task force composed of nearly a dozen agencies working with the cooperation of the state attorneys general and numerous state banking regulators.
Barr said regulators have been conducting on-site examinations of some of the nation's largest mortgage servicers. The exams are designed in part to ensure that filed foreclosures meet legal requirements and that affidavits the firms are filing in the nation's courts are accurate. Barr said officials also are working to determine whether the institutions properly considered troubled borrowers for loan modifications and other loss mitigation options before moving toward foreclosure.
Barr told the council that the probe includes "an assessment of each servicer's foreclosure policies and procedures, organizational structure and staffing, vendor management, quality control, loan documentation, including custodial management, and foreclosure processes." Examiners, he said, "are also conducting interviews with personnel and reviewing samples of individual borrower foreclosure files from all 50 states that include both in-process and completed foreclosures."
Barr said investigators are expected to complete their field work by the end of the year and report back to the oversight council in January. They then plan to aggregate their findings and determine what regulatory actions would rectify the problems.
The main objectives for federal investigators, Barr said, include determining the scope of the foreclosure problems, holding banks accountable for any lapses, ensuring that individuals harmed because of wrongdoing are given redress, and compelling the mortgage servicing industry to better inform homeowners about alternatives to foreclosure.
Barr said investigators also will study other issues that could be affected by the paperwork problems. Those include potentially massive losses from lawsuits seeking to force banks to buy back bad mortgages on the grounds that investors were misled about the mortgage-backed securities they purchased.
Tuesday's meeting, held in the ornate Cash Room at the Treasury Building, marked only the second gathering of the oversight council. Before the panel was established by the financial overhaul bill that was passed this year, no single regulatory entity was responsible for identifying and curbing systemic risks.
On Tuesday, Treasury Secretary Timothy Geithner and the other panelists invited comment on how to determine which financial market utilities - companies such as exchanges and clearinghouses that operate as the plumbing of the financial markets - should be deemed "systemically important." Such a designation could subject those firms to heightened regulation. Last month, the council solicited similar input concerning non-bank financial firms and received more than 1,500 comments from industry executives, consumer advocates and ordinary citizens. Banks with more than $50 billion in assets automatically will be considered systemically important. In addition, Geithnersaid that the council would push to have new rules in place by the middle of next year to bring comprehensive oversight to the vast financial derivatives market. That market has remained largely beyond the reach of regulators and was at the heart of the financial crisis.
Separately, Treasury spokesman Steve Adamske confirmed Tuesday that Barr is leaving his post to resume his academic career and spend more time with his family. However, an administration official with knowledge of the discussions said Barr is still under consideration for a different post, perhaps at the new Consumer Financial Protection Bureau or at the Office of the Comptroller of the Currency.
Staff writer Lori Montgomery contributed to this report.