Following the detection of critical deficiencies related to the foreclosure process,U.S. bank regulators are preparing to punishmortgage servicers, Reuters reported on Wednesday. Though the extent of penalty is still to be decided by the regulators, we can presume that it would come as a lesson to mortgage servicers and abate the looming threat on housing recovery.
Why and How of “Critical Deficiencies”
Referring the nationwide investigation related to the paperwork and procedures of foreclosures, the acting head of the Office of the Comptroller of the Currency, John Walsh, elucidated that many of the mortgage servicers violated state and local foreclosure laws.
As a result, the functioning of the foreclosure process was severely injured. This is the underlying reason behind the critical deficiencies. However, the impact was not as strong for homeowners as only few of them were unfairly evicted.
Among many other servicers, biggies like JPMorgan Chase & Co. (JPM), Bank of America Corporation (BAC) and Citigroup Inc. (C) were included in the investigation.
This is somewhat similar to the infamous foreclosure mess, which brutally maligned servicers’ reputation and financials.
Foreclosure Clutter
At the time of foreclosing homes, many lenders use ‘robo-signers’ — employees who sign hundreds of documents a day without verifying decisive information like the previously outstanding amounts of borrowers.
Despite being aware of the imminent danger, the negligence of homeowners and lawyers aggravated this problem. In many cases, signatures were not reviewed by any notary. Even when notarizations took place, it was unlikely that the officials executed the signings as per the legal requirement.
Flawed paperwork also raised questions about the validity of the ownership documents. There are many cases in which an individual who moved into a house after a payment may not be the legal owner. This resulted in mortgage lenders improperly expelling original owners from their homes as part of their foreclosure process.
Penalty: To What Extent?
According to the commissioner of the Federal Housing Administration, David Stevens, there are different views about the form and extent of penalty. It could be in the form of a fine payment to the government or a principal forgiving or perhaps something else. The final decision is yet to be hammered out.
According to Walsh, regulators have the power to seek financial penalty. They can also issue criminal referrals.
Foreclosure Mess Nearing End
The U.S. bank regulators and a task force of Attorneys General (AGs) of all 50 states are gearing up to settle the foreclosure mess at large financial institutions at the earliest. This would undoubtedly lessen the looming threat to housing recovery.
But the aftermath of faulty paperwork might still make it difficult for lenders to find home buyers in the years to come. The foreclosure mess would probably cast a long shadow on U.S. housing.
Still Apprehensive
Though the proposed settlement and penalty are expected to curb violation of regulations, which would gradually put an end to the foreclosure crisis, we expect the problem to linger for a longer period as in some cases lenders have no information about the owners of the loan. As a result, a significant stress will persist in housing recovery.
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