"Inexcusable" breakdown of foreclosure process cited

WASHINGTON Tue Nov 23, 2010 5:07pm EST

WASHINGTON (Reuters) - Regulators have found widespread and "inexcusable" problems in the way banks have foreclosed on homes and a fix is needed, a senior Treasury Department official said on Tuesday.

Michael Barr, assistant Treasury secretary for financial institutions, took mortgage service companies to task in summarizing the preliminary findings of a probe regulators have launched into how lenders have seized homes on which mortgage payments have fallen behind.

"The bulk of the examination work to date focused on the foreclosure process has found widespread and, in our judgment, inexcusable breakdowns in the foreclosure process," Barr told the second meeting of the Financial Stability Oversight Council. Its task is to make the financial system less prone to systemic breakdowns.

"These problems must be fixed," Barr added.

A Treasury-led task force is due to present a formal report of findings from its ongoing reviews at the top regulator council's next meeting in January, Barr said.

The task force includes the federal financial regulators, the Federal Trade Commission, the Department of Justice and the Department of Housing and Urban Development, as well as state attorneys general and bank supervisors.

Problems in subprime mortgage markets, where banks lent recklessly to underqualified borrowers whose earnings were inadequately documented, were blamed for helping trigger and intensify the 2007-2009 financial crisis.

STILL WREAKING HAVOC

In some respects, the crisis continues because a wave of foreclosures is helping to hold home prices down, hobbling recovery. Some investors insist banks should buy back poorly performing securities.

Barr said examiners were interviewing people involved in the foreclosure process and examining samples of individual borrower foreclosure files from all 50 states. He warned that consequences may flow from their findings.

"Once this field work is completed, regulators will aggregate results across institutions to ensure consistency, prepare supervisory letters and determine supervisory practices that may be needed," he said.

A fresh measure of distress in housing markets was issued on Tuesday, shortly before the stability council met, as a real estate lobby group reported October sales of U.S. existing homes fell 2.2 percent to an annual rate of 4.53 million.

The National Association of Realtors said part of the reason was that some banks temporarily halted sales of foreclosed homes while they work through questions about the paperwork involved in properly seizing a home.

WHO SIGNED WHAT?

Congress has held hearings on bank foreclosure practices and charges that in some cases they used "robo signers" to sign hundreds of foreclosure documents a day without proper legal review.

The Treasury has attempted to set up a program to slow the flood of foreclosures by having banks agree to modify loans and thus lower monthly payments. But it is widely seen as only marginally effective.

Figures issued last week showed that about 16,634 borrowers got a permanent loan modification under the Home Affordable Modification Program, down from 17,771 in September.

Facing public anger at banks that received tens of billions of dollars in taxpayer capital during the financial crisis, the Obama administration has put lenders' activities under a microscope and said they must change.

"In sum ... major financial institutions are being reviewed for problems across a wide range of issues in foreclosure processing, loss mitigation, origination put-backs, securitization trusts and disclosure requirements," Barr said.

Still, the Treasury has resisted calls for a nationwide moratorium on home foreclosures, arguing that this would slow the recovery of the troubled U.S. housing sector by delaying bank sales of properties for months and leaving too many houses vacant.

(Additional reporting by David Lawder, Editing by Chizu Nomiyama and Dan Grebler)

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