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The numbers are also looking bad for foreclosures. There are estimates that a record 1.2 million homes will be repossessed this year, and there are serious questions about the way many of those foreclosures that have been carried out, have been carried out. Prosecutors are investigating whether some of the country's largest banks committed fraud.

This comes after company employees acknowledged that they failed to conduct the required reviews. So far, Bank of America, Chase and GMAC Mortgage have put tens of thousands of foreclosures on hold across 23 states. Lawmakers want a nationwide moratorium. Lawsuits are in the works.

NPR's Chris Arnold has our report.

CHRIS ARNOLD Here's what everybody's trying to figure out: Is this just a costly paperwork glitch for the banks, or another serious mortgage fiasco for the whole country.

Thomas Lawler is an economist and former vice president at the mortgage giant Fannie Mae.

Mr. THOMAS LAWLER (Former Vice President, Fannie Mae): Right now, you know, good Lord, I've tried to read everything I can. I've called tons of people, I'm trying to figure out how big is this issue, and the answer seems to be nobody really knows.

ARNOLD: Nobody knows how the courts are going to react to all this, but everybody is taking this very seriously; in part because it's possible that the major lenders were committing fraud in hundreds of thousands of foreclosure cases over the past several years.

Mr. LAWLER: The sheer volume and magnitude of the number of cases that were done.

ARNOLD: So here's what the banks were allegedly doing. Twenty-three states have laws that require that lenders file an affidavit with the court, before they foreclose and take somebody's house. The person signing the affidavit is swearing under oath that they have reviewed the case, and that everything is accurate.

The problem is that bank employees admitted in depositions that they were not actually reviewing these documents, but were signing-off anyway.

Richard Cordray is the attorney general in Ohio.

Mr. RICHARD CORDRAY (Attorney General, Ohio): That's a fraud on the court. It's a basic subversion of our legal system. And it does not sufficiently respect people's private property rights.

ARNOLD: For their part, the lenders - GMAC Mortgage, Chase, and Bank of America - in written statements - basically all say that the underlying facts behind these foreclosures were sound, and that they weren't taking people's homes for no reason.

While the person who actually signed the affidavits may not have performed a review, JP Morgan Chase says, quote, "The affidavits were prepared by appropriate personnel with knowledge of the relevant facts, based on their review of the company's books and records."

So maybe this is just a problem of being sloppy and too casual with the paperwork and who signed it, but don't try to suggest that to Ohio's attorney general.

Mr. CORDRAY: Chris, youve just described this as being casual or sloppy. That's not what we have here. What we have here is lying under oath. The facts may or may not be correct. And this seems to have been an industry-wide practice, where the companies encouraged this and required it of their employees; to commit deliberate fraud on the court in case, after case, after case.

ARNOLD: Attorney General Cordray says it's also eerily similar to the industry-wide sanctioning of mortgage fraud that helped to create the whole foreclosure crisis in the first place.

So, the State of Ohio is now suing GMAC mortgage, who's parent company is an NPR underwriter. The attorney general is also investigating Chase, Bank of America and two other major lenders.

Mr. CORDRAY: We have filed a lawsuit against GMAC Mortgage and their parent company Ally. And we consider each separate incident of a false affidavit filed in a case, warranting full penalties of $25,000 per incident.

ARNOLD: Okay, $25,000 for each homeowner and there've been millions of foreclosures. This could be a serious next shoe to drop for the mortgage industry.

Mr. CORDRAY: This is so much bigger than a shoe.

(Soundbite of laughter)

ARNOLD: William Black is an associate professor of Economics and Law at the University of Missouri at Kansas City.

Professor WILLIAM BLACK (Economics and Law, University of Missouri, Kansas City): This is dropping the nuke, if this happens.

ARNOLD: Black says if judges start digging deeper into the foreclosure mess, they're also going to find that many loans from the housing bubble were so badly documented that many are unenforceable. And that'll be an even bigger mess.

To see if all this was just too doomsdayish, though, we called Harvard Economist Kenneth Rogoff.

Professor KENNETH ROGOFF (Economics, Harvard University): No, I think it's quite important because it, housing, may well have further to drop.

ARNOLD: And Rogoff says a big snarled process in the courts would prolong the foreclosure crisis.

Prof. ROGOFF: It would be better to get it over with. Have housing prices adjust and then start coming up again. And this slows it down. It creates a huge cloud of uncertainty. But at the same time, there's a fairness issue. What do you do?

ARNOLD: Meanwhile, the controversy has now reached the White House and President Obama says he will veto a bill that could have allowed lenders more flexibility, in signing court documents and speeding up foreclosures.

Chris Arnold, NPR News.

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