Banks probed in home seizures

WASHINGTON - Federal investigators are exploring whether banks and other financial firms broke U.S. law when using fraudulent court documents to foreclose on people's homes, according to sources familiar with the effort.

The criminal investigation, still in its early days, is focused on whether companies misled federal housing agencies that now insure a large share of U.S. home loans or committed wire or mail fraud in filing false paperwork.

Although prosecutors across the country previously opened a patchwork of inquiries, a broader federal effort targeting companies that improperly evicted people from their homes is now taking shape. This comes at the same time that investors have begun to hold firms accountable for selling securities composed of mortgages that were improperly serviced.

As part of this reckoning, the Federal Reserve Bank of New York has joined with some of the country's largest investors in seeking to force Bank of America to buy back about $47 billion worth of troubled home loans packaged into bonds by Countrywide Financial, which is owned by the bank. The New York Fed, along with Pacific Investment Management Co., MetLife Inc. and BlackRock Inc., invested in some of these bonds during the rescue of the financial system. Now, the bondholders are raising the prospect that Bank of America and Bank of New York Mellon Corp., the trustee of the mortgage securities, could be sued to recoup losses on the mortgage bonds.

The investors are demanding the repurchase of loans that were originated "in violation of underwriting guidelines," according to a statement by Kathy Patrick of law firm Gibbs & Bruns, which is representing the group.

BofA Chief Financial Officer Chuck Noski defended the servicing of its mortgages and briefed analysts on the company's potential exposure to loan repurchases during a conference call Tuesday.

"While we continue to review and assess the letter and have a number of questions about its content, including whether these investors actually have standing to bring these claims, we continue to believe the servicer is in compliance with its servicing obligations," Noski said.

In recent weeks, senior congressional lawmakers have called for a probe into the use of flawed foreclosure documents and questionable practices during foreclosures.

Members of President Barack Obama's Financial Fraud Enforcement Task Force and other administration officials are scheduled to meet today to discuss the foreclosure controversy. That is to be followed by a White House news briefing led by Shaun Donovan, secretary of the federal Department of Housing and Urban Development.

"In more than 25 years dealing with major financial-crisis issues, I have never seen this many agencies focused on a single issue," said Andrew Sandler, a defense lawyer who works on government investigations. "We are beginning to see signs of extensive governmental investigation that may also have criminal-law implications."

Federal law-enforcement officials usually have little authority to prosecute cases involving foreclosure law because they are largely in the states' domain.

But according to sources familiar with the investigation, the government has both an interest and the grounds to prosecute the abuses because housing agencies under HUD play a major role in insuring home loans.

Reports surfaced in recent weeks that large banks filed court documents across the country that had not been properly prepared or reviewed. The court documents would not have been filed in Arizona cases because foreclosures in the state are not overseen by a judge.

Now, federal investigators want to determine whether similar paperwork was submitted to housing agencies to get insurance payouts, a source said.

In some cases, bank employees have acknowledged signing documents without reviewing them. If similar filings were made to housing agencies, this could violate federal law, which makes it a crime to lie about substantive matters to the federal government.

Investigators are also looking at whether the transfer of mortgage and foreclosure documents through the mail and computer networks would allow the federal government to make a legal case on charges of mail and wire fraud.

Separately, the Securities and Exchange Commission has opened an informal inquiry into possible wrongdoing related to foreclosures. Attorneys knowledgeable about securities law said the SEC would look to see whether banks had properly disclosed to shareholders the risks and processes associated with the foreclosures.

"Whenever there are suggestions that there may have been any kinds of issues with respect to disclosure, misrepresentations or omissions, we are always looking at that kind of conduct," SEC Chairman Mary Schapiro said.

by Zachary A. Goldfarb Washington Post Oct. 20, 2010 12:00 AM



Banks probed in home seizures