A coalition of as many as 40 state attorneys general is expected Wednesday to announce an investigation into the mortgage-servicing industry, an effort some of them hope will pressure financial institutions to re-write large numbers of troubled loans.
The move come amid recent allegations that mortgage-servicers, which include units of major banks such as Bank Of America Corp., submitted fraudulent documents in thousands of foreclosure proceedings nationwide.
The banks say the document problems are technical — largely the result of papers approved by so-called robo-signers with little review — and don’t reflect substantive problems with foreclosures. Still, they have drawn criticism from consumer advocates and state and federal lawmakers.
“I think the mortgage-servicing firms need to understand that they face real exposure now, and they would be well advised to take this very seriously, to clean this up by doing loan workouts to keep people in their homes, which up till now they’ve just paid lip-service to,” said Ohio Attorney General Richard Cordray.
Some in Congress have called for a moratorium on all foreclosures until the documentation issue is resolved, though senior Administration officials Monday again declined to endorse that idea. Servicers that have lied to courts by filing incorrect paperwork “need to suffer the consequences for their irresponsible actions,” said Shaun Donovan, the Secretary of the U.S. Department of Housing and Urban Development. But “where we have not found problems with particular servicers … we do have some risk of going too far.”
The attorneys’ general immediate aim is to determine the scale of the document problems and correct them. But several of them have said that the investigation could force the lenders and servicers to agree to mass loan modifications or principal forgiveness schemes. Other possibilities include financial penalties or changes in mortgage servicing practices.
Lenders and servicers have largely resisted reducing principal on mortgages, instead focusing on interest-rate reductions or term extensions. Banks say they are worried about lawsuits from investors, some of whom could lose money in a principal write down.
Former New Jersey attorney general Peter Harvey, now a trial lawyer in New York, said that a settlement with state attorneys general would likely “to give the banks some cover” to make changes that might otherwise result in lawsuits by investors in mortgage-backed securities.
The mortgage servicers had little to say in response to an impending multi-state probe. “Our affidavit procedures and daily auditing demonstrate that our foreclosure affidavits are accurate,” said Tom Goyda, of Wells Fargo.
“We look forward to cooperating with the attorneys general,” said a spokesman for J.P. Morgan Chase & Co., which has suspended foreclosure sales and evictions in 23 states in response to questions about it use of robo-signers. A spokesman for Citigroup said the company, has “no reason to believe our employees have not been following” proper procedures in processing foreclosures. A spokeswoman for GMAC Home Mortgage Inc, a unit of Ally Financial, Inc, said it continued to review its loan documents.
The number of servicing companies that will be included in the probe hasn’t been determined.
Iowa attorney general Thomas Miller, who is leading the effort, said his office might take cues from an investigation brought by Massachusetts attorney general Martha Coakley. She successfully pressured Bank of America Corp. in March to reduce mortgage-loan balances by as much as 30% for thousands of borrowers, using the threat of a lawsuit to get a settlement, though documentation problems were not at issue then.
The primary weapon the states could wield would be their respective laws against unfair and deceptive acts and practices, said Prentiss Cox, a professor of law at the University of Minnesota and former Assistant Attorney General in Minnesota.
Those laws are easier to apply, however, when a lender misleads a borrower than in pursuing problems with foreclosures related to documentation, he said. Individual attorneys general could also bring actions under states’ various foreclosure laws.
Illinois Attorney General Lisa Madigan said she was preparing to introduce legislation meant to tighten foreclosure laws and prevent document errors in the future. She also is pushing federal representatives to resurrect a bill that would allow bankruptcy judges to “cram down,” or cut, a troubled homeowner’s mortgage debt.
Top lawyers from multiple states have gone after mortgage lenders before. In 2008, Bank of America Corp. settled charges brought by 15 attorneys related to accusations of predatory lending in its Countrywide Financial Corp. unit, granting loan modifications worth $8.4 billion to thousands of homeowners.
By Robbie Whelan and Ruth Simon, The Wall Street Journal
Vote out the inept and corrupt AGs and POLSs that sat on their thumbs for years as this occured right under their noses.
AGs and legislatures have allowed ridiculously HIGH credit card interest rates for DECADES and HAVE DONE NOTHING TO STOP the Predatory Practices.
ANYONE want a credit card that charges 40% interest when you include the fees and charges?
anyone? Only the desperate indeed apply!
Look, honey! The horse is out! I guess we ought to shut the barn door now.
As a realtor who specializes in short sales, I think these practices are just another example of the poor systems that the banks have in place. They have so many bad systems, I am actually surprised that there are not huge lawsuits from the investors who own these loans. It is easy to see that these systems create a situation, where the Banks minimize every penny they receive from these transactions. An interesting conflict of interest happens when, the servicer (any of these large banks) receives more fees from the investor (the entity that owns the mortgage & note), when the loan is delinquent; so they are financially better off to drag out the short sale & foreclosure process. Chuck Ginsberg, Solfire Realty, http://chicago-shortsalerealtor.com
Everything about this is corrupt. The Developers took out loans to build housing that became the infamous Subprime Mortgage Brokers that closed on over-priced real estate with a contract that could not be read for the words. Monthly payments that could be made for about a few years that were adjusted by contract to twice the monthly amount. Attorneys would foreclose for the Banks and then would place a Bid with the Public Trustee what became known as Subprime Recycling. The Attorneys owned the Title Companies that sold overpriced Title insurance guaranteed by AIG. The lawyers paid Sheriff Deputies to harass home buyers to move out without Due Process under the threat of arrest. The media should be educating the public served with foreclosure papers to not make payments to the Banks or Attorneys; it’s in the contract, you will still be evicted after the lawyers and banks have squeezed the last Dollar you have. Payments still need to be made but to whom? The answer is not the Bank or Lawyers but to the Public Trustee.
Fantastic thanks