U.S. Bank Regulators May Impose Fines, Seek Penalties in Foreclosure Mess

U.S. bank regulators investigating foreclosure problems could impose fines or seek criminal penalties as soon as January, said Julie L. Williams, chief counsel of the Office of Comptroller of the Currency.

“There clearly have been breakdowns,” Williams said today at a House Judiciary Committee hearing in Washington. Regulators’ findings could serve as a basis for prosecutions and the development of standards for mortgage servicers, she said.

Lawmakers criticized regulators for not doing enough to police the industry after Ally Financial Inc.’s GMAC Mortgage unit, JPMorgan Chase & Co. and Bank of America Corp. temporarily suspended home seizures in September. Foreclosure and bankruptcy lawyers have accused the companies of relying on “robo- signers” who endorsed thousands of foreclosure affidavits without checking their accuracy.

Under questioning from the committee, Williams and Phyllis Caldwell, chief of the U.S. Treasury Department’s office of homeownership, said they learned of problems with robo-signers from press reports.

“There were no warning signs,” Williams said. “In hindsight, when you think about the volume of transactions, we could have been more suspicious.”

The document allegations are compounding problems in the distressed housing market, where the Treasury’s Home Affordable Modification Program, or HAMP, has failed to reach its goals for limiting foreclosures.

‘Drowning in Bureaucracy’

“Homeowners must rely on the willingness of lenders to modify any mortgage terms to help save their homes from foreclosure in a system that is incapable of addressing their needs,” said Committee Chairman John Conyers, a Michigan Democrat. “Homeowners are drowning in bank bureaucracy.”

Representative Darrell Issa, a California Republican, said he will investigate HAMP when he takes the helm of the House Oversight and Government Reform Committee next month.

“This program seems to have outlived its usefulness,” Issa said. “We can use these funds better elsewhere.”

Lawyers who prepared testimony for the hearing said bank errors and the complexity of mortgage securitization has harmed borrowers.

James A. Kowalski, a Jacksonville, Florida, foreclosure defense lawyer, described a homeowner who is facing simultaneous foreclosure lawsuits filed by two different trustees both claiming to own the same loan.

Blaming Securitization

Jacqueline P. Yulee was sued by Wells Fargo Bank, a trustee for VNT Trust Series 2010-1, and U.S. Bank Trust National Association, a trustee for Sequoia Funding Trust, both for a $213,750 loan she took out on her Florida home in 2003.

In separate court filings Kowalski provided to the committee, Wells Fargo and U.S. Bank each claimed that Yulee’s loan had been signed over to them.

“It’s a bedrock securitization problem,” Kowalski said in an interview before today’s hearing. “Once we allowed the securitization model and the concept of the securitized trust servicer to run the show, we ended up going down this road.”

Judge F. Dana Winslow, who has presided over more than 1,000 foreclosures as a New York State Supreme Court justice, said judges might have “inadvertently contributed to the creation of the foreclosure crisis by accepting, without question, the submissions of lending institutions seeking foreclosure.”

That could be changing, Winslow said at the hearing. “Courts have come to recognize the need to scrutinize the evidentiary submission of lenders and their agents,” Winslow said.

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To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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