WASHINGTON Lawmakers hauled the top U.S. mortgage lenders and their regulators to Capitol Hill on Thursday to chastise them for widespread flaws in foreclosure documents, but failed to extract any promises of fines or fresh loan modification programs.
Major banks admitted sloppy documentation to a House of Representatives' subcommittee but said they had taken steps to tighten procedures and that the basis of their foreclosures has been accurate.
Federal regulators said they learned of the problems from news reports but are now actively reviewing banks' work and plan to issue their findings in January.
It was the second congressional hearing this week into revelations that lenders used "robo-signers" to sign hundreds of foreclosure documents a day, without proper legal reviews.
Maxine Waters, who chairs the House Financial Services housing subcommittee, repeatedly questioned whether regulators had gone far enough in their penalties and oversight. "Why should take you seriously?" she asked.
Lawmakers threw most of their best jabs at regulators, who testified first, while a panel with bank executives, who were sworn in as witnesses by Waters, was sparsely attended.
Officials from the Federal Reserve and other bank regulators were followed by executives from Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, and Ally Financial.
The U.S. housing industry remains in a multi-year slump that followed years of easy lending; a collapse that precipitated the recent financial crisis and the worst economic downturn since the 1930s.
Banks have now repossessed just over three million homes through October since January of 2007, according to real estate data firm RealtyTrac.
Mortgage servicing and foreclosure practices are being investigated by both federal officials and all 50 state attorneys general.
John Walsh, acting comptroller of the currency, said the problems were isolated at specific institutions, rather than a widespread industry issue. "I am not aware of a reason to believe there is a systemic failing of the system," he said.
The paperwork fiasco has reignited public anger with banks that received billions of dollars in taxpayer aid during the financial crisis.
Walsh said examiners were focused on monitoring banks' mortgage modification programs, rather than keeping a close watch on how they processed foreclosures.
Banking regulators warned in written testimony that banks could face fines or criminal referrals and urged institutions to maintain a capital cushion to cover any losses from the mortgage documentation problems.
Some industry experts think banks face a greater financial risk from investors demanding they repurchase mortgage-backed securities, charging they misrepresented the underlying loans, an issue often referred to as "putback risk."
In a letter released on Thursday, a group of House Democrats asked the new Financial Stability Oversight Committee to consider whether some financial companies should be required to divest affiliates that service securitized mortgages.
Fed Governor Elizabeth Duke told the house hearing that upcoming stress tests of the 19 largest U.S. banks would include estimates of the putback liability.
In their testimony, the bankers stressed their firms do everything possible to avoid foreclosure, and that troubled borrowers are not rushed out of their homes.
Wells Fargo said evicted homeowners were, on average, 16 payments behind on their loans. Bank of America and JPMorgan cited similar figures.
Lawmakers offered sharp criticism of the Obama administration's main program to help prevent foreclosures.
"I think it's safe to say HAMP is not meeting its goal of preventing foreclosures," Waters said, referring to the $50 billion Home Affordable Modification Program (HAMP) allocated from the $700 billion bank rescue package.
The number of borrowers helped by HAMP continued to dwindle, the Treasury Department said later on Thursday in releasing its October update on the program.
Phyllis Caldwell, who runs Treasury's Homeownership Preservation Office, defended HAMP at the hearing, saying it had transformed the operations of mortgage servicers, industry-speak for payment collectors.
Bank of America says it is ramping up modifications, but becoming more reliant on its own programs.
Both lawmakers and witnesses described a mortgage servicing and foreclosure process that is complicated, frustrating and difficult for borrowers to understand.
"We have processes not built for the current environment. It's been three years, we need to change the process," said Thomas Marano, head of mortgage operations at Ally Financial.
There was little agreement at the hearing, however, about what changes should be made.
Fresh data released on Thursday showed the U.S. housing recovery is still uneven.
The mortgage delinquency rate declined last quarter amid hints of improvement in the job market, but that bit of good news was countered by headwinds from defaults and rising foreclosure starts, the Mortgage Bankers Association said.
Top bank executives have said this week they want a settlement soon of the states' probe but the attorneys general have said a deal could be months away.
Any settlement is likely to require banks to make greater efforts to keep borrowers in their homes.
Duke told the hearing she would support some sort of mechanism like a nationwide fund for homeowners wrongly foreclosed upon -- an idea being considered by the state attorneys general.
"I think would be very positive if there was a mechanism to deal with these problems as they arise," Duke said.
(Reporting by Dave Clarke and Corbett B. Daly in Washington, Dan Levine in San Francisco, Joe Rauch in Charlotte; Editing by Tim Dobbyn)