* 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 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
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
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
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
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
"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
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)