Washington policy makers, who moved swiftly to calm markets during the subprime mortgage crisis in 2008, have resisted calls for similarly broad steps in response to concern that banks may have acted illegally to seize homes.
President Barack Obama and the federal agencies that share responsibility for housing finance are opposing calls for a nationwide foreclosure freeze, fearing further damage to the housing market. Even as bank stocks tumbled yesterday on concern that the mishandled loans will increase costs for lenders, the White House and federal regulators avoided any grand gestures designed to reassure investors.
Obama this week endorsed a coordinated investigation by attorneys general from all 50 states into whether lenders used false documents to justify foreclosures. Mounting a response on the federal level is complicated by the fact that responsibility for overseeing housing finance and foreclosure law is fragmented among U.S., state and local agencies, with no single regulator shaping policy.
“We can see all too painfully the results from that gap,” said Clifford V. Rossi, executive-in-residence at the Center for Financial Policy at the Robert H. Smith School of Business at the University of Maryland.
U.S. regulators say they are aggressively investigating whether employees of lenders including Ally Financial Inc., JPMorgan Chase & Co. and Bank of America Corp. have falsified documents used in foreclosure proceedings.
“No one should misunderstand the magnitude of our response,” said Federal Housing Administration Commissioner David Stevens. “The administration has been very clear that there is no excuse for not fixing the problem.”
Obama and Federal Deposit Insurance Corp. Chairman Sheila Bair have said it would be a mistake to halt foreclosures while banks and regulators determine whether lenders acted illegally. A nationwide moratorium could do more harm than good, they said, by slowing recovery from the worst economic crisis since the Great Depression and further destabilizing neighborhoods already roiled by record home seizures.
“I’m not sure it would help anyone,” Bair said in Washington this week. “The market does need to clear and a lot of those foreclosures do need to proceed.”
$2 Billion Monthly
Delays tied to the probes may cost U.S. lenders $2 billion for every month, said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, who put the cost of extending foreclosures at $1,000 monthly for each property in the pipeline.
“There are 2.3 million loans that are out there in foreclosure,” said John Courson, chief executive officer for the Mortgage Bankers Association. “The administration has in fact made the right decision by not pressing for an overall moratorium. They see the debilitating effects that could have from the standpoint of the entire economy.”
Yesterday, investors worried about the foreclosure crisis punished the big banks. Shares of Bank of America, Wells Fargo & Co. and Citigroup Inc. fell by more than 4 percent. Financial stocks in the Standard & Poor’s 500 Index fell 1.8 percent.
The federal response to the crisis so far has remained on an agency-by-agency level.
Federal banking regulators have been examining the document procedures of individual banks to pinpoint problems. The results of those exams will determine the next step, said Kevin Mukri, spokesman for the Office of the Comptroller of the Currency. The agency has directed seven of the nation’s largest servicers to review their foreclosure processes, including JPMorgan Chase, Bank of America, Citigroup, HSBC Finance Corp., PNC Financial Services Group Inc., and Wells Fargo & Co.
The FDIC has started an independent review of banks with which it shares loan losses and won’t make payments if it finds foreclosures were conducted unlawfully, the agency said.
“We have contacted our loss-share partners and requested certification that all past and future foreclosure claims filed under the loss-share agreement are compliant with the law,” Andrew Gray, an FDIC spokesman, said yesterday in a statement. “We can and will deny loss-share payments for any foreclosures that are found not to be compliant with state laws or not fully remediated.”
The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the largest sources of mortgage funding, has asked loan servicers to make sure they’re complying with the law.
The Federal Housing Administration, the third-largest backer of mortgages, has launched “a deep-dive review” of servicers to make sure they’re reviewing their processes, FHA Commissioner David H. Stevens said in an interview.
“We will hold them accountable,” Stevens said.
The Financial Fraud Enforcement Task Force is also reviewing the document problems, Stevens said. The task force, housed at the Justice Department, brings together more than 20 federal agencies, 94 U.S. Attorney’s offices and state and local law enforcement.
In resisting a foreclosure moratorium, the White House finds itself at odds with Democratic lawmakers campaigning to hold control of Congress after next month’s elections.
Several Democrats, including Senate Majority Leader Harry Reid, have urged lenders to institute a moratorium. Yesterday, seven senators including Barbara Boxer of California and Debbie Stabenow of Michigan, asked regulators including Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke to force lenders to extend cheaper loans.
Foreclosure filings totaled 930,437 in the third quarter, a 4 percent rise from the previous three months, according to RealtyTrac Inc. Filings in the states most affected by court reviews of foreclosure documents accounted for 40 percent of the total in the third quarter.