WASHINGTON/CHARLOTTE, North Carolina Major housing lenders agreed to costly fixes to their foreclosure practices as part of a settlement with U.S. bank regulators that jumped ahead of a states' probe.
Banks agreed to compensate borrowers who were wrongly foreclosed upon, to overhaul their mortgage operations, and undergo an independent review of their 2009 and 2010 foreclosures, with money penalties still to be decided.
JPMorgan Chase said on Wednesday the bank expects $1.1 billion of costs linked to the orders, as it hires 2,000 to 3,000 people to comply with the settlement.
The 14 financial institutions and service providers who settled with the Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision, also included Bank of America Corp, Wells Fargo & Co, and Citigroup Inc.
The bank regulators said the servicers still face financial penalties. "We're not letting that clock run forever, there will be civil money penalties," acting OCC head John Walsh told reporters.
The settlement announced on Wednesday leaves in doubt the total costs facing the industry. It also fails to resolve legal uncertainty that has stalled foreclosures, keeping the recovery of the broader housing market in limbo.
State and other federal agencies probing mortgage problems had previously hoped to announce simultaneous settlements and sought on Wednesday to portray the deal as a first step to fixing the broken foreclosure system.
Justice Department and Department of Housing and Urban Development officials told reporters they were negotiating with lenders on what should be included in reform plans due in 60 days under the settlement with banking regulators.
STATES TO PRESS ON
Iowa Attorney General Tom Miller, leader of the states' investigation, said the bank regulators' actions would not affect their pursuit of a joint settlement.
U.S. foreclosures are expected to peak in 2011 at around 1.2 million, California-based RealtyTrac said earlier this year. In 2005, before the housing bust, banks took back about 100,000 houses.
One banking analyst said the settlement would be costly to banks and would-be home buyers, while failing to keep people in homes they cannot afford.
"The banks are not going to do this for free. This is going to lead to higher loan costs," said Matt McCormick, portfolio manager at Bahl & Gaynor Investment Counsel Inc.
Federal regulators and state attorneys general have been investigating bank mortgage practices that came to light last year, including the use of "robo-signers" to sign hundreds of unread foreclosure documents a day.
Some state attorneys general, along with some parts of the Obama administration, had been pushing for principal reduction on troubled mortgages and fines of about $20 billion.
"The enforcement orders issued today are important, but they are only a first step in setting out a framework for these large institutions to remedy these deficiencies and to identify homeowners harmed as a result of servicer errors," said the Federal Deposit Insurance Corp.
OCC's Walsh said it is still possible the bank regulators will coordinate penalties on lenders with actions taken by the states and other federal agencies.
Consumer groups and some lawmakers were critical of the settlement, arguing the banking regulators proposal is too weak and that they should never have let the servicing problems erupt in the first place.
"This is typical of the bank regulators, showing up to put out the fire after the place has burned down," said John Taylor, chief executive of the National Community Reinvestment Coalition.
The bank regulators said they found a series of problems including servicers filing affidavits in court where an employee vouched for personally knowing the details to be true when they did not.
The banks neither admitted nor denied the findings.
Under the agreement, servicers would have to hire an outside consultant to review foreclosure actions that took place between January 2009 and December 2010.
Lenders would have to provide a single point of contact for borrowers involved in a foreclosure or loan modification program so they have a direct line to the servicer.
Servicers would also be prohibited from so-called "dual tracking," the practice of starting a foreclosure while a loan modification is pending.
Adam Levitin, a Georgetown University law professor who has been critical of the mortgage industry and its record-keeping, was skeptical of the outside reviews of foreclosures.
"The banks will only choose third parties friendly to them," he told Reuters. "Bottom line is this is a slap on the wrist. Do it yourself compliance is what this is about."
The other lenders and loan servicers who signed agreements with their regulators were: HSBC bank, MetLife Bank Bank, Ally Financial, PNC bank, SunTrust, US Bancorp, Aurora Bank, EverBank, OneWest Bank and Sovereign Bank.
Lender Processing Services Inc, which helps banks manage mortgage foreclosure documentation, also reached a settlement with the bank regulators, as did the Mortgage Electronic Registration Service, known as MERS, a company established by the big loan servicers to track mortgage ownership and whose legal standing has been questioned by some courts in foreclosure cases.
(Reporting by Dave Clarke in Washington, Clare Baldwin in New York and Joe Rauch in Charlotte; Editing by Lisa Von Ahn and Tim Dobbyn)