States hit banks with mortgage probe

A foreclosed home is seen in Bullhead City, Arizona, November 4, 2009.

WASHINGTON/NEW YORK (Reuters) - All 50 states launched a joint investigation of the mortgage industry on Wednesday, a move some experts fear may slow sales of foreclosed homes and threaten the recovery of the fragile housing market.

The state attorneys general are looking at allegations some banks did not properly review files or submitted false statements to evict delinquent borrowers from their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.

"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney General Lori Swanson said.

"The latest allegations of corner-cutting and slipshod paperwork are troubling, but perhaps not surprising."

Iowa's attorney general, Tom Miller, told Reuters the states were seeking redress for affected homeowners and financial penalties "where appropriate." They might also press lenders to change procedures and modify loans for people struggling to make mortgage payments, he said.

Industry analysts warn the investigation could slow foreclosure proceedings. One of every four homes sold in the second quarter was a foreclosed property and any slowing could have an impact on the broader economy, as the housing market traditionally drives recoveries after a downturn.

Underscoring those concerns, the regulator for the government-owned mortgage finance giants Fannie Mae and Freddie Mac called on mortgage servicers not to slow down foreclosure cases that had clean paperwork.

The United States has an $11 trillion residential mortgage market.

The paperwork controversy has refocused attention on the foreclosure crisis just weeks before the November 2 congressional election in which Democrats look likely to suffer major losses due to voter unhappiness over President Barack Obama's economic policies.

The White House has endorsed the investigation by the states but rebuffed calls by some senior Democratic lawmakers and others for a temporary nationwide moratorium on foreclosures, fearing it would do more harm than good.

Miller said the attorneys general were "very conscious of the broader housing market issues and the broader economy issues."

"ROBO-SIGNERS"

The states are investigating the use of "robo-signers" -- people who sign hundreds of affidavits a day -- by banks and companies that collect monthly mortgage payments. It is alleged they did not properly review the documents they were signing.

"What we have seen are not mere technicalities, as some suggest," Ohio Attorney General Richard Cordray said.

Sheila Bair, chairman of the Federal Deposit Insurance Corp told a conference in Washington that robo-signing was a "serious matter" for the entire mortgage industry. It was the first public comment by a bank regulator on the controversy.

JPMorgan Chase, the second-largest U.S. bank, said it had identified some issues in its review of foreclosure affidavits but was "pretty comfortable" that its decisions to foreclose had been proper.

"We're not evicting people who deserve to stay in their house," Chief Executive Jamie Dimon said on a conference call.

JPMorgan, which posted higher-than-expected profits on Wednesday, is among three big mortgage servicers to announce a halt to some foreclosures pending reviews.

Bank of America Corp, the largest U.S. mortgage servicer, has temporarily halted evictions nationwide. Other lenders have declared more limited suspensions or left their foreclosure policies in place.

Barclays Capital analysts said the questions over paperwork accuracy "have the potential to significantly slow foreclosure proceedings in the near-term and potentially impact home sales and prices."

But the research note said the impact on banks' results would be minimal if they were able to show that the bulk of the foreclosures were handled properly.

The KBW Banks Index closed 1 percent lower, even as broad U.S. stock indexes hit their highest levels in five months.

BAD TIMING FOR BANKS

Banks are anxious to resolve the issue as soon as possible. Some real estate agents are already reporting that potential buyers are worried about buying bank-owned homes whose provenance could later be called into question.

The furor comes at a bad time for banks still trying to burnish their images after the financial crisis, which was fueled in part by excessive risk-taking on Wall Street.

It also invites further scrutiny by federal regulators who are writing new rules for the financial industry aimed at preventing such practices in future.

Federal Reserve Chairman Ben Bernanke, who regulates U.S. banks, pledged to pursue "appropriate remedies" at a meeting on Wednesday, a low-income housing advocacy group said.

The National Community Reinvestment Coalition, whose board of directors met the entire Fed board, called on the central bank to support a nationwide moratorium on foreclosures.

(Additional reporting by Elinor Comlay in New York and Joe Rauch in Charlotte, North Carolina and Dave Clarke in Washington; Writing by Ross Colvin; Editing by John O'Callaghan and Tim Dobbyn)