* Banks, housing could suffer in worst outcome -panel
* Oversight panel gives range of possible outcomes
* Bank industry faces $52 billion mortgage put-back risk
* BofA, JPMorgan to face Senate Banking panel on Tuesday
(Adds Treasury, ASF and Moynihan comments)
By Dave Clarke and Corbett B. Daly
WASHINGTON, Nov 16 Widespread problems in how
U.S. lenders documented foreclosures could spark a wave of
legal challenges resulting in massive losses to banks and
serious new troubles for the housing market, a federal watchdog
warned on Tuesday.
The Congressional Oversight Panel, the overseer of the
government's Wall Street bailout, in its latest report laid out
a range of possible outcomes for the foreclosure paperwork mess
that emerged in September.
In the best-case scenario, the watchdog said, concerns
about the paperwork mess are "overblown" and banks would be
able to proceed with foreclosures as soon as invalid court
documents were replaced with proper paperwork.
But in the worst-case scenario, it warned that banks could
face billions of dollars in losses.
Banks are accused of having used "robo-signers" to sign
hundreds of foreclosure documents a day without proper review,
a fiasco that reignited public anger with banks that received
billions of dollars in taxpayer aid in the financial crisis.
Bank of America (BAC.N), Ally Financial and JPMorgan
(JPM.N) were among banks that temporarily suspended
foreclosures pending internal reviews of their practices, but
have since begun to resume sales of foreclosed properties.
Bank of America and JPMorgan officials are due to testify
before a Senate panel later on Tuesday. [ID:nN14285999]
In the worst-case scenario, the panel said banks may be
unable to prove that they own the mortgage loans they claim to
own, legal challenges could call into question the validity of
33 million mortgage loans -- many of which were then
securitized and sold to investors -- and banks could face
billions of dollars in unexpected losses.
"If such problems were to arise on a large scale, the
housing market could experience even greater disruptions than
have already occurred, resulting in significant harm to major
financial institutions," the 125-page report said. "At present,
the reach of these irregularities is unknown."
The American Securitization Forum on Tuesday pushed back
against claims that mortgage servicing problems could pose
problems for the mortgage backed securities market, saying it
has conducted its own study of the issue.
"We are confident that the process in which market
participants assign and transfer mortgage notes and mortgages
is valid, sound and legally binding," ASF Executive Director
Tom Deutsch said in a statement.
The panel, created to oversee the $700 billion bank rescue
approved by Congress in 2008, also said banks could end up
losing $52 billion from so-called mortgage put-backs, or loans
that were sold to other investors but would have to be bought
back due to problems that have turned up.
Those losses would be borne predominantly by Citigroup
(C.N), JPMorgan Chase, Bank of America and Wells Fargo (WFC.N),
the panel said.
Banks have been eager to downplay the impact of the mess
over foreclosure paperwork, saying evictions through
foreclosure have been "materially accurate."
Bank regulators and all 50 state attorneys general are
investigating bank foreclosure practices. On Tuesday Bank of
America Chief Executive Brian Moynihan said a quick settlement
with the states is best for all involved. [ID:nN16104232]
"It is in everyone's best interest to get this settled and
behind us," said Moynihan, speaking at the Bank of America
Merrill Lynch Financial Services conference in New York.
He also said the bank was working through its mortgage
repurchase requests from private investors. While the costs for
buying back bad mortgages, or put-backs, will be manageable,
Moynihan said such disputes could drag on for years.
Banks face lawmaker scrutiny later on Tuesday in hearings
by the Senate Banking Committee, and then another hearing on
Thursday before the House of Representatives Financial Services
A top Bank of America executive acknowledged problems in
the bank's foreclosure practices in testimony prepared for the
Senate hearing and said Bank of America is working to replace
previously filed affidavits in as many as 102,000 pending
"Thus far, we have confirmed the basis for our foreclosure
decisions has been accurate. At the same time, however, we have
not found a perfect process," said BofA home loans chief
Barbara Desoer in the prepared testimony.
David Lowman, chief executive for home lending at JPMorgan
Chase, also laid out missteps in foreclosure paperwork and said
the bank is cleaning up errors.
The banks are not the only ones under fire. Regulators are
facing criticism from lawmakers for not picking up on the
paperwork problems earlier. Many of these regulators --
including officials from the Federal Reserve, the Office of the
Comptroller of the Currency and the Housing and Urban
Development Department -- are scheduled to appear at Thursday's
Obama administration officials have said they are taking
the issue seriously.
"We strongly believe that the reported behavior within the
mortgage servicer industry is simply unacceptable, and
servicers who have failed to follow the law must be held
accountable," Treasury spokesman Mark Paustenbach said in a
statement. "That's why the Administration has led a coordinated
interagency effort to investigate misconduct, protect
homeowners and mitigate any long-term effects on the housing
(Reporting Corbett B. Daly and David Clarke in Washington;
Additional reporting by Joe Rauch in Charlotte, N.C.; Editing
by Leslie Adler and Chizu Nomiyama)