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UPDATE 2-US Treasury: Foreclosure woes not systemic threat
October 27, 2010 / 6:36 PM / 7 years ago

UPDATE 2-US Treasury: Foreclosure woes not systemic threat

* Treasury says monitoring mortgage “put-back” risk daily

* OCC: Banks must assess mortgage bond put-back risks

* Distressed properties seen eventually coming to market

* Sen. Warner urges Obama to create foreclosure task force (Adds Sen. Warner letter)

By David Lawder

WASHINGTON, Oct 27 (Reuters) - The U.S. Treasury does not see a systemic financial threat from the risk that banks will be forced to buy back mortgage securities due to faulty foreclosure documents, a senior Treasury official said on Wednesday.

But the foreclosure controversy could put downward pressure on home prices by delaying the sale of thousands of distressed properties, Phyllis Caldwell, chief of Treasury’s Homeowner Preservation Office, told a bailout watchdog panel,

Treasury is closely watching the situation involving mortgage “put-back” risk to major banks, Caldwell told the Congressional Oversight Panel.

“We are very closely monitoring any litigation risk to see if there’s any systemic threat but at this point there is no indication that there is,” she said.

All 50 states have launched a joint investigation into whether mortgage servicers filed faulty affidavits in foreclosure cases, threatening a new wave of problems for lenders and placing a cloud over the long-delayed recovery of the distressed U.S. housing market.

A member of the Congressional Oversight Panel, Damon Silvers, objected to Treasury’s benign view of the threat, citing a demand by eight large investors, including the Federal Reserve Bank of New York, that Bank of America (BAC.N) take back some $47 billion in mortgage bonds because of mishandled mortgages backing them.

According to Fed estimates, Bank of America would likely have to book a $23 billion loss on the securities if forced to buy them back, Silvers said.

“Five such requests, if honored, to Bank of America will amount to more than the current market capitalization of Bank of America, which is now $115 billion,” Silvers told Caldwell.

“Now, do you wish to retract your statement that there is no systemic risk in this situation? And the word is risk -- not certainty -- but risk,” he added. “I would urge you to do so because these things can become embarrassing later.”

Caldwell said there were many factors involved in assessing put-back risks, including the severity of problems with the mortgages, the litigation itself, and the probability that it might be successful.

“It is still early and we are monitoring it daily,” she said.

Bank of America Chief Executive Brian Moynihan last week vowed to fight litigation from investors who want to offload poorly performing mortgage bonds. He characterized investors’ claims as: “I bought a Chevy Vega and I want it to be a Mercedes.”

BANK REGULATOR WANTS RISKS ASSESSED

The Office of the Comptroller of the Currency, a top U.S. bank regulator, pledged to make sure that banks adequately assess the risks of lawsuits over the foreclosure mess and carry adequate reserves to cover losses.

“We’re working with our banks to assess that put-back risk and basically make sure that is properly dimensioned, that they have the reserves for that, and make sure they are doing a very full, complete analysis of that,” Joseph Evers, the OCC’s deputy comptroller for large bank supervision, told the oversight panel.

Another witness at the hearing, Inside Mortgage Finance publisher and chief executive Guy Cecala, said that in 25 years of covering the industry, he was not aware of any successful litigation involving a violation of foreclosure procedures that required lenders to buy back loans.

Caldwell said it may take several months months for mortgage servicers, state courts and law enforcement agencies to clear up questions over foreclosures, delaying the process.

Longer foreclosure timelines will push down prices, particularly for vacant houses, and uncertainty over the status and titles of already foreclosed homes may also discourage buyers.

“This would hurt homeowners and home buyers alike at a time when foreclosed homes make up 25 percent of home sales,” Caldwell said in prepared testimony. “Together, these two factors may exert downward pressure on overall housing prices both in the short and long-run.”

Treasury believes, however, that while the probes may in the near-term reduce the number of foreclosed houses available for sale, most distressed properties affected by the controversy will “eventually come onto the market.”

Caldwell also scolded mortgage servicers that have reported possible filings of faulty foreclosure affidavits, including Bank of America, Ally Financial, and JPMorgan Chase (JPM.N).

“The reported behavior of these mortgage servicers is unacceptable,” she said. “Servicers must comply with all applicable laws and regulations and be held accountable if they do not.”

Separately, U.S. Senator Mark Warner urged the Obama administration to create a non-partisan task force to examine the foreclosure problems and make recommmendations to improve the transparency of the process.

In a letter to the White House, he said such policy recommendations could come as early as mid-December if the administration acted quickly to set up the panel. (Reporting by David Lawder; Editing by Leslie Adler)

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