Fed is joining investigation of foreclosure procedures

WASHINGTON - Raising pressure on banks, the Federal Reserve is wading into the investigation of whether mortgage lenders cut corners and used flawed documents to foreclose on homes.

Major banks are already under investigation by state officials with subpoena power, who could force them to detail how they handled hundreds of thousands of foreclosure cases.

Federal Reserve Chairman Ben Bernanke added weight to those efforts Monday by saying that the central bank would look "intensively" at policies and procedures that might have allowed banks to seize homes improperly.

"We take violation of proper procedures very seriously," Bernanke said in remarks to a housing-finance conference in Arlington, Va.

The Fed has the power to impose penalties on some of the nation's largest banks. Still, most legal experts expect an investigation by attorneys general in all 50 states to have a swifter impact.

Big mortgage lenders are looking into whether employees signed foreclosure documents without reading them. Some banks have halted tens of thousands of foreclosures since similar practices became public.

While the banks say there's little if any evidence that any foreclosures were improper, regulators around the country have suggested the banks were in a rush to foreclose and may have committed outright fraud.

Bank of America and Ally Financial Inc.'s GMAC Mortgage have started processing foreclosures again, after calling a temporary halt while they reviewed mortgage documents.

It's happening as the housing market struggles to recover. Sales of previously occupied homes rose 10 percent in September, but the foreclosure problem surfaced only at the end of the month. Industry experts say fears could keep buyers on the sidelines now.

Ohio Attorney General Richard Cordray said Bernanke's speech will force financial institutions to take the matter more seriously. In stepping up their inquiries, the Fed and other bank regulators are "not giving aid and comfort to institutions that want to sort of minimize this and almost sweep it under the rug," Cordray said.

The Fed is working with the Treasury Department's Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. They have a range of options, including ordering companies to stop certain practices, imposing fines and working with lenders to come up with a fix.

According to two officials familiar with the joint federal inquiry, the banking agencies are looking into whether companies had controls in place when foreclosure documents were signed and whether employees involved in the foreclosure process were adequately trained. Ultimately, though, the mess will probably be settled by the states.

"They can move more quickly than the Fed," said Mark Williams, a former bank examiner at the Fed and now a Boston University lecturer.

Like the Obama administration, Bernanke and other federal regulators have declined to call for a national moratorium on foreclosures. At least one regulator, Sheila Bair, chairman of the FDIC, is even discouraging homeowners from overloading the courts with lawsuits.

"The regrettable truth is that many of the properties currently in the foreclosure process are either vacant or occupied by borrowers who simply cannot make even a significantly reduced payment," Bair said Monday.

by Jeannine Aversa and Alan Zibel Associated Press Oct. 26, 2010 12:00 AM




Fed is joining investigation of foreclosure procedures