Once criticized for being too quick to offer home loans to borrowers who could not afford them, the nation's banks are now being charged with being too quick to pull the trigger and pursue foreclosures — even if it meant filing invalid or fraudulent paperwork.
Amid charges that loan servicers "robo-signed" documents or failed to determine who holds the title before seizing property, the 50 state attorneys general said Wednesday they would investigate the foreclosure practices of the nation's largest loan servicers. But the attorneys general stopped short of calling for a national moratorium on foreclosures.
"This group has the backing of every state in the nation to get to the bottom of this foreclosure mess, and we plan to work together as thoroughly and expeditiously as possible," said Iowa Attorney General Tom Miller, who will head the probe.
"This is not a gray area. Either our legal requirements for filing foreclosures were followed or they weren't, and we will hold the companies accountable for their systematic violations," New Jersey Attorney General Paula Dow said in a statement.
Some of the nation's major mortgage lenders, including Bank of America and Ally Financial (formerly GMAC), have halted foreclosure proceedings in all 50 states.
"The most important thing that the lenders need to recognize is the seriousness of the situation," Ohio Attorney General Richard Cordray told the Washington Post. "They can't pretend this is a fourth-grade student not quite filling in the oval on a test. This is fraud."
With a pivotal congressional election just weeks away, many political leaders say banks should issue a blanket moratorium on all foreclosures. 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.
Major banks are already bracing for a wave of lawsuits from homeowners who are fighting to keep their homes or from investors who bought bundles of mortgage loans from Wall Street and now won't be able to collect.
Moratorium a bad idea?
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 Mortgage Bankers of America and the Financial Services Roundtable said in a letter circulated last week.
The use of fraudulent documents to pursue foreclosures is a "serious problem," White House aide David Axelrod said Sunday on CBS' Face the Nation. However, he said, "I'm not sure about a national moratorium, because there are, in fact, valid foreclosures that probably should go forward, and where the documentation and paperwork is proper."
Also, stopping the foreclosure process "could have significant impacts on prolonging the housing recovery," said David Stevens, commissioner of the Federal Housing Administration.
Seizure of foreclosed homes and sales are at a record high. During the third quarter, banks seized 288,345 properties and 372,445 foreclosure auctions were scheduled, according to a report issued Thursday by RealtyTrac, which tracks foreclosures. Nevada had the most foreclosure filings, followed by Arizona, Florida, California, and Idaho. For example, in hard-hit Nevada, foreclosure sales made up 56 percent of all sales activity.
Morgan Stanley estimates that as many as 9 million U.S. mortgages in the foreclosure pipeline or already through the process may face legal challenges because of questions about the validity of documents.
Economists say the vast majority of people facing foreclosures will likely wind up losing their homes.
This latest crisis over housing finance is yet another logical consequence of the surge of easy-money lending that took place during the early years of the decade. Mortgage bankers were eager to make new loans, often offering enticing "teaser" loans, which require small, if any, down payments and very modest monthly payments at first.
Later analysis showed that poor families and those without much financial information were most frequently steered toward these nontraditional loans that would soon prove unaffordable. Mortgage brokers often got extra financial inducements for selling these loans.
In the midst of the housing boom, tens of thousands of mortgage loans were bundled into packages that were in turn sold to investors seeking steady returns. In the so-called securitization of thousands of these loans, the transfer of paperwork among parties became hard to track. But that didn't stop some lenders from rushing through the foreclosure process without ensuring that their facts were correct.
In a Florida suit, for instance, a paralegal involved in about 100,000 foreclosures in the last two years testified that the firm systematically forged signatures, backdated documents, filed false attorney fees and ignored significant flaws in legal mortgage documents.
Because real estate law requires that paperwork be physically transferred between parties when mortgage ownership is transferred, an improper transfer raises questions about who actually owns the property.
Michael Zielenziger writes about business and the economy. He lives in the San Francisco Bay area.