Bailout Panel Warns of Bank Mortgage Losses, Urges Stress Tests

Regulators should conduct new stress tests on banks because legal challenges to foreclosures and uncertainties in the housing market could threaten the financial system, a congressional watchdog said.

“If document irregularities prove to be pervasive and, more importantly, throw into question ownership of not only foreclosed properties but also pooled mortgages, the result could be significant harm to the financial stability,” the Congressional Oversight Panel for the Troubled Asset Relief Program said in a report today.

“Bank regulators should also conduct new stress tests on Wall Street banks to measure their ability to deal with a potential crisis,” the report continued.

The attorneys general in all 50 states last month opened an investigation into whether banks and loan servicers used faulty documents or improper practices to foreclose on homes. President Barack Obama has rejected calls for a nationwide moratorium on foreclosures, saying it could hurt the housing recovery.

The nation’s biggest mortgage lenders say they are addressing problems to the system and federal regulators have stepped up efforts to protect borrowers. That doesn’t address potential long-term risk to the system, the panel found.

“In the worst-case scenario, a clear chain of title -- an essential element of a functioning housing market -- may be difficult to establish for properties subject to mortgage loans that were pooled and securitized,” according to the report.

The panel, led by Senator Ted Kaufman, a Delaware Democrat, singled out one investor demand that could seek to force Bank of America Corp. to repurchase and absorb partial losses on $47 billion in loans.

‘Disabling Damage’

“If several similar-sized actions -- whether motivated by concerns about underwriting or loan ownership -- were to succeed, the company could suffer disabling damage to its regulatory capital,” the panel found.

Mortgage servicers “who have failed to follow the law must be held accountable,” Treasury spokesman Mark Paustenbach said in an e-mail in response to the oversight panel’s report. “That’s why the administration has led a coordinated interagency effort to investigate misconduct, protect homeowners and mitigate any long-term effects on the housing market.”

Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office, told the oversight panel in a hearing last month that “at this stage there appears to be no evidence of systemic risk.”

A bondholder group represented by Kathy Patrick, a lawyer with Houston-based Gibbs & Bruns LLP, is pushing Charlotte-based Bank of America to repurchase home loans. The bank said in a Nov. 4 letter to Patrick that she had failed “to set forth a single fact in support of any of your allegations.”

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