U.S. close to punishing banks over foreclosures

A foreclosed home is seen in Stockton, California in this May 13, 2008 file photo.

WASHINGTON (Reuters) - U.S. bank regulators are finalizing punishments against mortgage servicers after a probe found "critical deficiencies" with the industry's foreclosure processes.

John Walsh, the acting head of the Office of the Comptroller of the Currency, said a national probe of foreclosure paperwork and procedures found that mortgage servicers broke laws, and that a small number of homeowners were wrongly evicted.

"These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole," Walsh said in congressional testimony obtained on Wednesday by Reuters.

Walsh did not identify any servicers, but his testimony noted that the probe included Bank of America, Citibank, JPMorgan, and Wells Fargo, among others.

In separate testimony on Wednesday, David Stevens, the commissioner of the Federal Housing Administration, said the penalties could range from fines paid to the government to loan modifications to banks forgiving some of the principal balance on the loan.

"There are a variety of discussions. There are different views," Stevens told lawmakers on the House Financial Services Subcommittee on Insurance, Housing and Community Opportunity, noting that no final decisions have been made.

Pressed on the timing of any announcement, Stevens replied: "I would say a month timeframe is probably in the reasonable range if we are to reach some sort of conclusion."

SIZE OF PENALTIES?

Asked if the magnitude of the potential penalties could reach the range of billions or even tens of billions of dollars, Stevens declined to comment.

"What are the potential costs that each individual agency and state attorney general could ultimately assess against these institutions? We need to understand what that total potential estimation could be, and off of that, that is what we will have to work on to determine if there is a way we can come together and make this less disruptive in the market," Stevens said.

Walsh has said in the past that regulators have the power to seek monetary penalties against the servicers and to issue criminal referrals.

The biggest U.S. mortgage servicers have been accused of taking possibly illegal shortcuts in some foreclosure proceedings, such as using "robo-signers" to sign hundreds of unread documents a day and advancing foreclosures without proof they held the mortgages.

The allegations have been a reputational and financial hit for the companies. They are facing repurchase demands from investors in mortgage-backed securities and multiple probes from bank regulators and all 50 state attorneys general.

Walsh said in testimony prepared to be delivered on Thursday before the Senate that mortgage servicers emphasized speed and cost efficiency over quality and accuracy in their foreclosures.

He noted that the bad behavior varied across the industry. He also said that despite servicers' deficiencies, U.S. examiners found that the foreclosures involved seriously delinquent loans and that servicers generally maintained documentation of ownership.

Walsh said only a "small number" of foreclosure sales should not have proceeded. He cited cases of military families and foreclosures in which the loan had been approved for a trial modification.

(Reporting by Karey Wutkowski; additional reporting by Corbett B. Daly; Editing by Gary Hill and Dhara Ranasinghe)