Signs of foreclosure paperwork problems were missed, FDIC chief says

Reporting from Washington —  Regulators should have foreseen a wave of suspect foreclosure paperwork coming, a key official admitted Monday as federal banking agencies said they had launched their own in-depth review of the issue.

“In retrospect, there were warning signs that servicing standards were eroding,” Sheila Bair, chairwoman of the Federal Deposit Insurance Corp., told a housing finance conference in Arlington, Va. “Those signs should have caused market participants and regulators alike to question current practices.”

One such warning, she said, was a significant decline in recent years in the fees charged by mortgage servicers.

“We should have been asking how servicers were able to achieve such efficiencies without sacrificing quality,” Bair said. “Sadly, those questions were not asked.”

Federal Reserve Chairman Ben S. Bernanke, who also spoke at the conference, hosted by the Fed and the FDIC, said that banking regulators were concerned about “reported irregularities in foreclosure practices at a number of large financial institutions” and that he expected preliminary results next month from the review.

“We are looking intensively at the firms’ policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures,” Bernanke said. “We take violations of proper procedures seriously.”

The Fed and other banking regulators also are looking at the potential effects of the reported foreclosure paperwork problems on the real estate market and financial institutions, Bernanke said.

The Department of Housing and Urban Development, the Treasury Department, the Justice Department and other agencies are also conducting a comprehensive review of foreclosure practices. HUD Secretary Shaun Donovan last week said those agencies had not found a “systemic” threat to the financial system posed by paperwork problems. Their examination won’t be finished before the end of the year, he said.

Attorneys general in all 50 states also are conducting a joint investigation into how lenders have verified foreclosure documents, including allegations that so-called robo-signers vouched for information they hadn’t read.

Federal officials have resisted calls for a nationwide moratorium on foreclosures as the inquiries are conducted, arguing that such a move could do more harm than good by tying up a chunk of the fragile real estate market.

Bair echoed those concerns Monday, saying she feared that litigation over botched paperwork “could ultimately be very damaging to our housing markets if it ends up unduly prolonging those foreclosures that are necessary and justified.”

Calling foreclosure a last resort to be used only if a mortgage modification can’t be worked out, Bair said “the regrettable truth” was that many properties in the foreclosure process were vacant or occupied by people who had been behind on their payments for a while.

Bank of America Corp. last week ended its self-imposed moratorium on foreclosures in 23 states but said it was still reviewing its actions in California and 26 other states to make sure they complied with states’ laws. Ally Financial Inc., formerly GMAC Inc., also has resumed some foreclosures after suspending them.

Bair suggested some foreclosures should be given “safe harbor” to continue — those on vacant properties or in which a borrower failed to make loan payments that had been lowered by at least 25%.

The Obama administration has been pushing banks to modify mortgage terms so more borrowers can stay in their homes. But the $75-billion Home Affordable Modification Program has struggled to ease the foreclosure crisis and has been the subject of sharp criticism.

Government figures released Monday show that 51% of the 1.37 million borrowers who have received trial modifications under the program have dropped out, usually because they failed to make their reduced payments.

The Los Angeles-Orange County area continued to have the most activity under the program, with 42,361 active permanent and three-month trial modifications through September, or 6.6% of the national total. The Inland Empire was third, with 33,554 total modifications through September, or 5.2% of the total.

jim.puzzanghera@latimes.com