Attorneys general and mortgage regulators for all 50 states announced a coordinated investigation of the mortgage-servicing industry in response to allegations that questionable documents were used to support potentially hundreds of thousands of foreclosures nationwide.
Led by officials representing many of the states with the highest foreclosure rates, including Florida, Arizona and California, the review is expected to focus on whether lending institutions made false statements or prepared documents improperly in the process of evicting borrowers from their homes.
In a joint statement released Wednesday, the officials said foreclosure proceedings "appear to have procedural defects." In many foreclosure cases, they said, mortgage servicing employees apparently "did not have personal knowledge of the facts asserted in the documents," a violation of many states' laws.
The officials said they will look closely at the industry practice of "robo-signing," in which mortgage company employees sign documents without reviewing the terms and absent a notary public, as required by most state laws. The officials said robo-signing "may constitute a deceptive act and/or unfair practice."
The inquiry will center on several of the largest lenders — GMAC Mortgage, a unit of Ally Financial Inc.; Bank of America; and JPMorgan Chase & Co. The companies recently acknowledged finding questionable documents for thousands of foreclosures, largely due to "robo-signers" who approved repossessions but didn't properly review the cases.
The institutions have temporarily stopped processing questionable foreclosures while they conduct internal reviews. Other banks, such as PNC Financial, have announced they are reviewing mortgage servicing procedures.
The state officials are hoping to pressure lenders to restructure more distressed loans, or work out principal-forgiveness programs, to keep borrowers in their homes. Some state officials hope to reopen the argument for the federal government to allow bankruptcy judges to lower, or "cram down," the mortgage debt of struggling homeowners. Financial institutions have fought such efforts.
The investigation buttresses calls by homeowner advocates for a moratorium on foreclosure proceedings that began when the mortgage crisis struck in 2008. Many congressional Democrats took up the effort once Bank of America became the first lender last week to temporarily halt its foreclosures process.
"It's about time they did it," said Kathleen Day, spokeswoman for the nonprofit Center for Responsible Lending, of the states' action. The organization was a plaintiff in a Maine lawsuit against Ally Financial that helped shed light on questionable foreclosure proceedings.
"Everybody has known for a long time, including [bankruptcy court] judges, that the mortgage servicers have done bad things. This is the smoking gun, and it's widespread," Day said.
The White House backs the multistate investigation, but says a foreclosure moratorium could slow the housing recovery.
The National Association of Realtors said a moratorium would hurt the housing recovery and is unnecessary. It says there is no proof of widespread fraud or inaccuracies.
"We haven't had a whole lot of documented evidence of there being ... problems on these foreclosures, or much evidence beyond administrative errors," says Lucien Salvant, a spokesman for the Realtors group.
Salvant says the real estate industry is also worried about how the halt in foreclosures will affect the already beleaguered housing market.
"We're at a start of a fragile recovery and anything can hurt it," Salvant says. "There may be some instances where they may have been improper. We're urging lenders to do check them as quickly as possible so that it doesn't lead to a lot of delays that can cause problems."