Bernanke says top regulators digging deeper into banks' robo-sign scandal
"The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgage servicing operations," Federal Reserve Chairman Ben Bernanke said Monday in the prepared text of a speech at a conference on foreclosures and the future of housing. "We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures."
Bernanke's statement follows the recent announcement of a joint investigation by attorneys general from all 50 states into the burgeoning foreclosure scandal. At issue is whether mortgage lenders falsified affidavits attesting to their review and verification of foreclosure documents, as well as whether they failed to sign the affidavits in the presence of a notary public.
"We take violations of proper procedures seriously," Bernanke said. "We anticipate preliminary results of the review next month. In addition, Federal Reserve staff members and their counterparts at other federal agencies are evaluating the potential effects of these problems on the real estate market and financial institutions."
The Arlington, Virginia conference highlighted the release of a new Federal Reserve report, Addressing the Impact of the Foreclosure Crisis, which details the community-based foreclosure prevention and neighborhood stabilization activities sponsored by the Federal Reserve as part of its Mortgage Outreach and Research Efforts initiative. Although Bernanke was on hand to discuss the new report, he also talked about on events leading up to the newest calamity to plague the nation's housing market.
"It was ultimately very destructive when, in the early part of this decade, dubious underwriting practices and mortgage products inappropriate for many borrowers became more common," he said. "In time, these practices and products contributed to problems in the broader financial services industry and helped spark a foreclosure crisis marked by a tremendous upheaval in housing markets."
As a result, Bernanke told the conference, more than 20% of homeowners are "underwater," i.e., owe more on their homes than they are worth. An additional 33% have equity cushions of 10% or less, putting them at risk if real estate values continue to decline.
"With housing markets still weak, high levels of mortgage distress may well persist for some time to come," he warned.
The foreclosure story first made headlines in September, when GMAC Mortgage halted evictions in 23 states after reports surfaced that a GMAC employee admitted "robo-signing" more than 10,000 foreclosure affidavits a month,which GMAC attributed to a "procedural error." Within days, a number of attorneys general announced independent investigations of GMAC practices in their respective states.
The scandal quickly spread to other major mortgage lenders, with news reports that employees at Bank of America and JPMorgan Chase also admitted to robo-signing. Bank of America subsequently announced a suspension of foreclosure sales in all 50 states, GMAC announced it was expanding its foreclosure review to all 50 states, and Chase said it was expanding its foreclosure review to 41 states and 115,000 loan files.
Bank of America and GMAC have since lifted their freeze, although investigations continue.