Regulators warn banks on foreclosure mess costs

CHARLOTTE, N.C./SAN FRANCISCO (Reuters) - Banks could face fines or criminal referrals if widespread problems are found in foreclosure documents used to evict hundreds of thousands of homeowners, U.S. regulators said on Wednesday.

A vacant home for sale is pictured in Yonkers, New York, October 26, 2010. REUTERS/Mike Segar

The Federal Reserve and other bank overseers are also advising lenders to maintain sufficient capital to cover any losses associated with documentation problems, including delays in the sale of foreclosed properties.

Lenders are accused of having used “robo-signers” to sign hundreds of foreclosure documents a day without proper legal reviews, a fiasco that has reignited public anger with banks that received billions of dollars in taxpayer aid during the financial crisis.

Attorneys general from all 50 states are pursuing their own probe and are negotiating a settlement that is likely to require banks to make greater efforts to keep borrowers in their homes.

A source familiar with that investigation said Citigroup Inc, Wells Fargo Corp and Ally Financial’s GMAC Mortgage were due to meet representatives of the multi-state probe for the first time later this week.

Bank regulators are scheduled to appear along with executives from Bank of America, JPMorgan, Wells Fargo, Citigroup, and Ally Financial before a House of Representatives Financial Services subcommittee on Thursday.

In testimony released on Wednesday ahead of the hearing, major lenders admitted to sloppy paperwork but said they had taken steps to tighten procedures and that the basis of their foreclosures has been accurate.

CitiMortgage Managing Director Harold Lewis said in testimony for Thursday that the lender would refile about 4,000 foreclosure affidavits, but that “there is no reason” to suspend foreclosures.

Ally Financial admitted flaws in its foreclosure process. Thomas Marano, head of mortgage operations, said no homeowner has been foreclosed on who was not in default, but the paperwork errors should not have happened.

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JPMorgan’s chief financial officer joined on Wednesday a growing chorus of industry executives calling for a speedy resolution of the probes.

“We work very hard with our regulators to come to the right answer and we hope to do that quickly as well,” said JPMorgan CFO Doug Braunstein, speaking at the Bank of America Merrill Lynch financial services conference.

Parties to the states’ investigation warn a final deal is months away.

Federal Reserve Governor Elizabeth Duke and John Walsh, acting comptroller of the currency, said in their prepared testimony that bank agencies will publicly release the findings of their foreclosure probe in early 2011.

In the meantime, Duke and Walsh said regulators are instructing banks to correct any procedure problems, while warning they have a range of enforcement actions they can impose, depending on what their probe uncovers.

“These range from informal memoranda of understanding to civil money penalties, removals from banking, and criminal referrals,” Walsh said.

Duke said regulators are also determining whether banks are adequately prepping for so-called “put-back” risk, in which investors accuse lenders of misrepresenting the loans that underpin mortgage securities and demand repayment.

The Congressional Oversight Panel said earlier this week that banks could end up losing $52 billion from mortgage put-backs. Those losses would be borne mostly by Citigroup, JPMorgan, Bank of America and Wells, said the panel that oversees the government’s Wall Street bailout.

Duke said the Federal Reserve is “quite concerned” about irregularities in foreclosure practices, but is still trying to understand the scope and potential impact of the problems.

“Delays and uncertainty resulting from flaws in the foreclosure process have the potential to delay recovery in housing markets and to undermine confidence in our financial and legal systems,” Duke said.

She said the Fed expects about 2.25 million foreclosure filings this year and again next year, and about 2 million more in 2012.

Reporting by Dave Clarke in Washington, Dan Levine in San Francisco, Joe Rauch in Charlotte, and Maria Aspan in New York; Writing by Karey Wutkowski; Editing by Tim Dobbyn