Foreclosure Chaos Could Hurt Banks, Housing Market

Flawed foreclosure paperwork could inflict huge losses on the nation's top banks and spread chaos through the housing market, according to a congressional report.

Accusations that major mortgage lenders including Bank of America Corp. (BAC), used flawed or even forged documents to foreclose on homes have worried officials in state and federal governments.

Companies that service a total of $6.4 trillion of mortgages are involved in the accusations, according to a report from the Congressional Oversight Panel, The Associated Press said.

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The report lays out a range of possible consequences of flawed documentation:

Banks could face billions of dollars of losses as they discover they are still legally responsible for loans they thought they had sold.

Judges could block all foreclosures.

Borrowers may find it impossible to ascertain whom they should send their mortgage payments to.

Prospective buyers could find themselves in limbo.

"Serious threats remain that have the potential to damage financial stability," said Sen. Ted Kaufman, D-Del., the watchdog panel's chairman. "This is an incredibly complex problem. It could turn out to be nothing. It could turn out to be a big deal."

Attorneys general in all 50 states are currently investigating the foreclosure process to check for signs of abuse. Lenders including Bank of America, JPMorgan Chase (JPM) and GMAC Mortgage have all suspended foreclosures at some point as a result of the accusations.