Source: The New York Times
By Sewell Chan
The uncertainty over the legal status of foreclosed homes in the nation could further depress home prices and delay the recovery of the housing market, the Obama administration said on Wednesday.
Phyllis Caldwell of the Treasury said Wednesday that the government believed the overall risks to the financial system were slim.
The warning came at the first Congressional hearing since the magnitude of the problem gained wide attention. Distressed properties make up one quarter of all home sales.
Revelations about paperwork shortcuts and so-called robo-signed affidavits, as well as the likelihood of protracted legal battles by homeowners and inquiries by state and federal officials, will hinder foreclosure proceedings and discourage prospective buyers, a Treasury Department official said.
"Together, these two factors may exert downward pressure on overall housing prices both in the short and long run," said the official, Phyllis R. Caldwell, chief of the homeownership preservation office at the Treasury.
Most at risk, it appears, are communities in the states with the greatest concentrations of foreclosures -- led by Nevada, Florida, Arizona and California -- where the turnover of vacant properties could screech to a halt if a joint investigation being conducted by all 50 states, and reviews by the Obama administration and regulators like the Federal Reserve, uncover additional wrongdoing.
The administration's testimony did little to soothe members of the Congressional Oversight Panel overseeing the Troubled Asset Relief Program, the 2008 bailout, who said the bungled foreclosures could set back the nation's fragile economic recovery.
"If investors lose confidence in the ability of banks to document their ownership of mortgages, the financial industry could suffer staggering losses," the panel's chairman, Senator Edward E. KAUFMAN, Democrat of Delaware, told Ms. Caldwell. "The possibility is especially alarming, coming so soon after taxpayers spent billions of dollars to bail out these very same institutions."
Another panel member, Richard H. Neiman, the New York State banking superintendent, asked, "How do we continue to look homeowners in the eye and ask them to continue to work with their servicers given the latest news pertaining to faulty documents and fraudulent affidavits?"
While banks and mortgage servicers are bracing for a wave of lawsuits over flawed paperwork, Ms. Caldwell said the government believed the overall risks to the financial system were slim.
"We're very closely monitoring any litigation risk to see if there is any systemic threat, but at this point, there's no indication that there is," she testified.
Other witnesses were less sanguine, telling the panel that financial institutions like Bank of America, the nation's largest consumer bank, had understated the dimensions of the problem.
Katherine M. Porter, a law professor at the University of Iowa and an authority on mortgage servicers, said it was likely that "a very large number -- perhaps virtually all -- securitized loans made in the boom period in the mid-2000s," contained serious paperwork flaws, did not meet underwriting standards or have not been serviced properly in foreclosure proceedings.
"Mortgage servicing is a high-volume industry," Professor Porter testified. "Its personnel have relatively little training, weak supervision and are under pressure to cut costs and boost profits."
Along with Bank of America, GMAC Mortgage, JPMorgan Chase and the PNC Financial Services Group have suspended some foreclosure proceedings since late September, though some institutions have resumed them. The industry has maintained that the mistakes were limited in scope and under control, but Professor Porter said they should be "treated as part of a pattern or practice of illegal behavior and not as isolated incidents."
Professor Porter said litigation was emerging along two fronts: homeowners are contesting foreclosures, and investors are charging that shoddy loan originations or servicing have increased their losses. These investors are trying to force banks to buy back or repurchase loans that were packaged and sold as investments.
Guy D. Cecala, chief executive of Inside Mortgage Finance, which publishes newsletters and research for the industry, said that most mortgage executives believed the problems "are largely procedural and can be corrected fairly quickly."
However, he acknowledged that the industry's view could be wrong. "The risk is that some of the investigations now under way uncover criminal misconduct or large-scale errors that force foreclosures to be put on hold for an extended period of time," he said.
Julia Gordon, a lawyer at the Center for Responsible Lending, a nonprofit consumer group, said that buyers had "become skittish" about so-called real-estate-owned properties, which sit on a bank's books after an unsuccessful foreclosure auction, because they thought that the title to the home might not be good.
"To get the market working again, buyers need assurances that the foreclosures are legal and not vulnerable to challenge," she said. "Having banks claim to fix thousands of mortgages within a couple of weeks without more information is unlikely to restore public confidence."
Ms. Gordon urged a "temporary pause" on foreclosures to review the banks' procedures, echoing calls by groups like the National Community Reinvestment Coalition. But the Obama administration has resisted a nationwide moratorium, with the housing secretary, Shaun Donovan, saying it would "do far more harm than good."
The recent disclosures have further complicated matters for the administration, which has faced withering criticism from Republicans and Democrats over the pace and effectiveness of its effort to mitigate foreclosures.
The Treasury revealed on Monday that the pace of mortgage modifications slowed in September. Fewer than 470,000 households have gotten permanent modifications under the Home Affordable Modification Program, which began in 2009 and is voluntary but gives lenders incentives to participate.
That number is far fewer than the administration's goal of helping three million to four million households avoid foreclosure by the end of 2012.
Although 1.3 million households have been offered trial modifications, in many cases, homeowners have been unable to convert temporary modifications into permanent ones because they could not document that they had the income to support the new, lower payments.
A report this week by the special inspector general for the Troubled Asset Relief Program said that 5.5 million homes had been the subject of foreclosure filings and that 1.7 million homeowners had lost their homes since January 2009.
"A program that began with much promise now must be counted among those that risk generating public anger and mistrust," the official, Neil M. Barofsky, concluded.
At the hearing on Wednesday, a Republican member of the oversight panel, J. Mark McWatters, said, "The administration has inadvertently created a sense of false expectations among millions of homeowners who reasonably anticipated that they would have the opportunity to modify or refinance their troubled mortgage loans."
The Democratic members of the panel -- Mr. KAUFMAN, Mr. Neiman and Damon A. Silvers, a lawyer at the A.F.L.-C.I.O. -- did not come to the Treasury's defense.