Report: Foreclosure mess poses grim outlook for banks

Posted on Friday, November 19, 2010

A report released Tuesday by the Congressional Oversight Panel suggests allegations that banks may have bypassed legally required steps to foreclose on homes pose a grim outlook for financial institutions.
Under a best-case scenario, the 127-page report suggests concerns about mortgage documentation irregularities may prove overblown.
However, under an extreme scenario, those practices could call into question the validity of some 33 million mortgages, the report notes.
“Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse,” the report notes.
The panel, which was formed in 2008 to oversee the government’s bailout of Wall Street, is urging the U.S. Department of the Treasury and bank regulators to take “immediate steps to understand and prepare for potential risks.”
Gene J. Kirsch, a senior banking analyst with Jupiter-based Weiss Ratings, which ranks banks and insurance companies, expects that what will actually happen will fall somewhere in middle of the panel's prognostications.
He believes the larger banks have the reserves to handle the financial challenges that may come up.
"Where most of the stress will fall is on some middle ground or regional players," he said.
Bank of America, JPMorgan Chase and Ally Financial are among those banks that put foreclosures on hold to review their procedures. BofA said on Tuesday that it is changing its foreclosure procedures to ensure all legal documents are properly reviewed.
In South Florida, Plantation attorney David Stern is under investigation for allegedly engaging in robo-signing or processing hundreds of foreclosure documents without proper review.
In a deposition, one of his former employees said the firm was very big on rushing to get the foreclosures pushed through the system, which often resulted in failure to properly process the cases.
On Monday, the chief justice of the Florida Supreme Court said he was “deeply concerned” about allegations that some judges may have conducted foreclosure proceedings behind closed doors, instead of in the open, as mandated by law.
His comments were in response to concerns from the American Civil Liberties Union of Florida, the First Amendment Foundation and several media outlets that so-called “rocket dockets” were forcing judges to clear cases quickly and without due process.
Kirsch said he believes that most of the problems with foreclosures are "technical in nature" and for the most part will be upheld in court. On the other hand, he expects organizations like Stern's will go away and be replaced by "more legitimate" ones.
The congressional panel, meanwhile, made several recommendations. Among them:
• Treasury should monitor closely the impact of foreclosure irregularities, report its findings to the public and Congress and prepare for the potential worse case scenario.
• Treasury and the Federal Reserve should stress test banks to evaluate their ability to weather a crisis related to mortgage irregularities.
• Policymakers should evaluate systemwide consequences of documentation irregularities.

South Florida Business Journal - by Susan R. Miller

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