FBI Looking at Financial Industry's Foreclosure Mess

FBI Looking at Financial Industry's Foreclosure Mess

The Associated Press | October 20, 2010 | 04:45 AM EDT

Big lenders are trying to move past the foreclosure-document mess, saying they're now confident their paperwork is accurate. Yet they face so much organized resistance that they can't just snap up their briefcases, declare the crisis over and move on.

— Attorneys general in all 50 states are jointly investigating whether lenders violated state laws.

— Lawyers for evicted homeowners are preparing lawsuits against major lenders.

— State judges have signaled they will review the banks' foreclosure documents with skepticism.

The document crisis, in other words, appears far from over.

Statements on Monday by Bank of America [ BAC 11.208  -0.592 (-5.02%) ] and GMAC Mortgage that they are resuming foreclosures in the 23 states that require a judge's approval brought a wave of denunciations from public officials Tuesday.

Attorneys general and other officials said bank officials could face civil — and potentially criminal — charges for flouting court procedures in handling foreclosure documents.

Meanwhile, a federal law enforcement official says the FBI is in the initial stages of trying to determine whether the financial industry may have broken criminal laws in the mortgage foreclosure crisis.

The law enforcement official says the question is whether some in the industry were acting with criminal intent or were simply overwhelmed by events in the wake of the housing market's collapse.

The official spoke on condition of anonymity because the investigation is just getting under way.

Hundreds of judges around the country have the authority to penalize bank officials who violate their procedural rules.

They could also force thousands of foreclosure cases to go to full trials rather than issue a quick ruling.

Judges won't take well to banks that filed erroneous documents with their courts, said Indiana Attorney General Greg Zoeller.

"There could be some serious consequences," including criminal charges, Zoeller said.

Even if there aren't, lawsuits are likely to continue for years, said Guy Cecala, publisher of trade publication Inside Mortgage Finance.

"Some of these plaintiffs' attorneys clearly smell blood in the water," Cecala said.

They froze those cases amid allegations that their employees signed but didn't read documents that may have contained errors.

State officials argue that the systems the banks used to process foreclosures were inherently flawed and likely remain so.

They are vowing to push ahead in their investigations.

"While they are telling us that they have fixed those problems, we can't just take their word for it," said Patrick Madigan, an assistant attorney general in Iowa who is spearheading the 50-state investigation.

"We intend to independently verify whether the problems have been fixed." Some judges say the document problems are persisting.

Justice Arthur Schack of State Supreme Court in Brooklyn, who's gained national attention for throwing out flawed foreclosure cases, said he's still finding errors.

In a stack of foreclosure cases sitting on his desk, he said he found flaws in most of them after a 10-minute once-over.

"It's nice of Bank of America to issue a press release," Schack said.

"But they'd better file all their paperwork and makes sure it's done correctly, because they're asking me to take someone's house away."

Florida has been the state most affected by the document mess.

Officials there say they're skeptical that banks have managed to resolve their paperwork problems so fast.

Chief Judge J.Thomas McGrady of Florida's 6th Judicial Circuit on Florida's Gulf coast, said judges in his circuit will scrutinize foreclosure documents, case by case.

Peter Ticktin, a Florida plaintiffs' attorney, said, "Pragmatically, it is impossible" for the bank to fix documents so quickly.

Bank of America says it will begin next week to refile documents for more than 100,000 foreclosure cases.

CEO Brian Moynihan said on a conference call Tuesday that employees who have reviewed the bank's documents have found no inaccurate information that "would affect the plain facts of the foreclosure." The federal government is also starting to get involved.

Housing and Urban Development Secretary Shaun Donovan, Treasury Secretary Timothy Geithner and other officials plan to meet on the issue Wednesday, but no announcements are planned.

Officials from the Federal Housing Administration, a government agency that guarantees home loans, have found clear disparities in how five major lenders have been responding to distressed homeowners after a four-month review of their practices, according to an administration official who declined to be named because the probe was not complete.

The review was reported earlier by the Wall Street Journal. The official declined to name the lenders in question.

The government has the power to fine lenders not complying with FHA guidelines. The White House has said federal agencies are investigating the allegations of flawed foreclosure documents.

But the Obama administration has rebuffed calls for a national halt to foreclosures. It says doing so could hurt the housing market by making it harder for buyers of foreclosed homes to complete their transactions.

Attention will shift next month to Capitol Hill, where House and Senate lawmakers have scheduled hearings.

Rep.Maxine Waters, D-Calif., said Tuesday that she was "disappointed by Bank of America's rush to resume foreclosures after such a short review."

Waters has introduced legislation that would bar lenders from foreclosing without offering homeowners any assistance.

Consumer advocates and some lawmakers, meanwhile, argue that banks need to do far more than refile and re-sign piles of flawed documents.

They say the banks must correct the way they handle foreclosures and requests for aid from distressed homeowners.

Those efforts have been widely criticized as inadequate.

Intermission, at Best, in Battle Over Foreclosures

The New York Times | October 20, 2010 | 05:04 AM EDT

Bank of America may be trying to bring down the curtain on the foreclosure furor, but there were numerous indications Tuesday that the problems would not move off-stage so quickly.

A day after the bank said it would once again pursue defaulting borrowers in the 23 states where foreclosures were overseen by the courts, judges in Florida said they were expecting even more challenges from defaulting homeowners.

The White House is convening a meeting of regulators and administration officials on Wednesday to review federal investigations into the foreclosure crisis, while state law enforcement officials emphasized their inquiry into flawed foreclosures was continuing.

“There has been an attempt by some of the major servicers to indicate there are no problems,” said Patrick Madigan, an assistant attorney general in Iowa. “We’re not at the end of this process. We’re at the beginning.”

All 50 state attorneys general have joined in an investigation into lenders’ foreclosure processes, which in at least some cases appear to have been so sloppy that legal requirements went by the wayside.

The lenders maintain the errors involved mere technicalities, while lawyers for defaulting homeowners say they are symptomatic of a foreclosure system out of control.

The Obama administration, which declined last week to push for a national freeze on foreclosures, emphasized Tuesday that it was committed to holding accountable any bank that had violated the law.

Robert Gibbs, the White House press secretary, said that the administration was “strongly supporting the investigation by the state attorneys general” while noting that the Federal Housing Administration and Financial Fraud Enforcement Task Force have undertaken their own investigation.

Federal regulators have been looking into loan servicing problems for some months before the recent freezes by the big lenders.

The meeting at the White House on Wednesday, which will be attended by the housing and urban development secretary, Shaun Donovan, among others, will focus in part on concerns about the foreclosure crisis’s effect on the housing market and the larger economy.

In remarks at a quarterly news briefing Tuesday, William C. Dudley, president of the Federal Reserve Bank of New York, said the Fed was “seeking to establish the facts” in conjunction with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency.

“We want to ensure that the housing finance business is supported by robust back office operations,” he said. He gave no timetable for when such a review might be completed.

Whatever the outcome of the various investigations, the era when the vast majority of foreclosures were unopposed and easily granted may be waning.

Some judges in Florida, the state whose courtrooms are the most overwhelmed by foreclosures, said they were likely to scrutinize the papers submitted by the big lenders with extra care.

“If we get information that there was a problem with a prior affidavit, maybe we look more carefully at the next one,” said Peter D. Blanc, chief judge of the 15th Judicial Circuit in West Palm Beach, Fla.

Thomas McGrady, chief judge of the Sixth Judicial Circuit in Clearwater, said it was still an open question for him and other judges whether they would accept amended documents from Bank of America or force the lender to refile its cases.

“All of the courts are struggling with this,” Mr. McGrady said.

The investigation by the state attorneys general is so new — it was formed last week — that its scope is still being settled.

Behind the question of improper foreclosure documentation lies a more important issue of whether lenders even have legal standing to foreclose because they lack the original mortgage note as required by law.

“The problems are not over, but their extent remains to be seen,” said Mr. Madigan, the Iowa assistant attorney general.

Bank of America [ BAC 11.34  -0.46 (-3.90%) ], the country’s largest lender, announced it was unfreezing foreclosures in the 23 states less than three weeks after it froze them. A process that many expected to take months was completed in days.

In its statement, the bank said that it had “reviewed our process” and found it satisfactory enough to file new affidavits in 102,000 pending cases starting next week. Documents in those cases were presumably improperly done before.

A bank spokesman declined Tuesday to explain more fully the lender’s review process.

GMAC Mortgage [ GMA 22.23  -0.11 (-0.49%) ], another large lender that had announced a freeze, also said it was refiling cases.

“We have more training, more people, a more robust policy now,” Gina Proia, a spokeswoman said.

Four years ago, in a case that foreshadowed the current uproar, a Florida court censured GMAC for false testimony. An employee said in a deposition that she had neither reviewed the record of the mortgage in the case nor known how it was created, which contradicted her sworn affidavit.

GMAC promised at the time to clean up its procedures, reminding employees not to sign court pleadings unless they had independently reviewed and checked the facts.

Despite GMAC and Bank of America’s proclamations that everything is now being done by the book, some legal and financial experts are disbelieving.

“The banks have dragged their feet and taken forever to do loan modifications, yet within less than two weeks they have managed to review hundreds of thousands of foreclosure cases,” said Adam J. Levitin, an associate professor of law at the Georgetown University Law Center.

“It is simply not credible.” Mr. Levitin is convinced that the lenders will suffer for what he sees as their attempt to put themselves above the rules.

“The genie is out of the bottle,” he said.

While most cases in Florida are still unopposed, the judges there are already starting to see an increase in defendants with counsel, even if they are simply acting as their own lawyer.

“The largest impact has been from the publicity,” said Lee E. Haworth, chief justice of the 12th Judicial Circuit in Sarasota. ”A lot more borrowers are coming forward to oppose summary judgment. More hearings are going to be contested.”