How some of the U.S. lenders are handling the widespread problems regarding the issues of "robo-signers" dealing with the foreclosure mess could spark a new wave of legal challenges resulting in huge losses to not only banks but also to the housing market.
Overseer of the government's Wall Street bailout, the Congressional Oversight Panel, said in its latest report that there are a range of possible outcomes from the foreclosure paperwork mess that emerged this past September.
First, in the best-case scenario, the concerns about the paperwork mess could be "overblown" and the banks will most likely proceed with their foreclosures when invalid court documents are replaced with proper paperwork. However, in the worst-case scenario the banks could face billions of dollars in losses.
Banks have been accused of using "robo-signers" to handle hundreds of foreclosure documents each day without proper review and supervision. As a result this fiasco has reignited public anger towards banks that received billions of dollars in taxpayer aid in the financial crisis.
JPMorgan Chase, Bank of America and Ally Financial are among some of the banks that temporarily suspended foreclosures while waiting for internal reviews of their practices, but have since resumed sales of foreclosed properties.
JPMorgan Chase and Bank of America officials are due to testify before a Senate panel this week.
In the worst-case scenario, banks that are unable to prove that they own the mortgage loans they claim to own could be followed by legal challenges which could call into question the validity of over 33 million mortgage loans and banks could face billions of dollars in unexpected losses.
The report from the Congressional Oversight Panel stated, "If such problems were to arise on a large scale, the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions. At present, the reach of these irregularities is unknown."
The Congressional Oversight Panel, which was created to oversee the $700 billion bank rescue approved by Congress in 2008, also said banks could end up losing $52 billion from mortgage put-backs which are loans that were sold to other investors and would have to be bought back as a direct result of the foreclosure document problems that have turned up.
The panel further said that those losses would mainly hit Citigroup, JPMorgan Chase, Bank of America and Wells Fargo.
Eager to downplay the impact of the mess over foreclosure paperwork, banks have said that evictions through foreclosure have been "materially accurate."
Yesterday, Bank of America Chief Executive Brian Moynihan said that a quick settlement with the states is best for all involved saying, "It is in everyone's best interest to get this settled and behind us."
He also stated that Bank of America was working through its mortgage repurchase requests from private investors. Even though the costs for buying back bad mortgages, or put-backs, will be manageable it could drag on for years.
Banks face lawmaker scrutiny this week before the House of Representatives Financial Services Committee.
One of Bank of America's top executives acknowledged problems in the bank's foreclosure practices in testimony prepared for the Senate hearing but said that Bank of America was working to replace previously filed affidavits in more than 100,000 pending foreclosure cases.
BofA home loans chief Barbara Desoer in the prepared testimony said, "Thus far, we have confirmed the basis for our foreclosure decisions has been accurate. At the same time, however, we have not found a perfect process."
Chief executive for home lending at JPMorgan Chase, David Lowman, listed their missteps in foreclosure paperwork and said the bank is cleaning up their errors.
Regulators, and just the banks, are also facing criticism from lawmakers for not picking up on the paperwork problems earlier. Many regulators, including some from the Federal Reserve, the Office of the Comptroller of the Currency and the Housing and Urban Development Department are scheduled to appear at a House hearing tomorrow.
Some Obama administration officials have said they are taking this issue very seriously.
Treasury spokesman Mark Paustenbach said in a statement, "We strongly believe that the reported behavior within the mortgage servicer industry is simply unacceptable, and servicers who have failed to follow the law must be held accountable. That's why the Administration has led a coordinated interagency effort to investigate misconduct, protect homeowners and mitigate any long-term effects on the housing market."