US banking regulators probe foreclosure scandal
Bernanke pledges action if mortgage lenders' practices breached their own procedures
Published 26/10/2010 | 05:00
Federal banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on Americans' homes, Federal Reserve chairman Ben Bernanke said yesterday.
Preliminary results of the in-depth review into the practices of the nation's largest mortgage companies are expected to be released next month, Bernanke said in remarks to a housing-finance conference in Arlington, Virginia.
"We are looking intensively at the firms' policies, procedures and internal controls related to foreclosures and are seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bern- anke said. "We take violation of proper procedures very seriously."
The central bank's decision adds weight to federal and state investigations into whether banks used flawed documents to foreclose on homeowners.
Attorney generals in all 50 states, plus the District of Columbia, are jointly investigating whether paperwork and legal procedures were handled properly. At the federal level, the Treasury Department's Office of the Comptroller of the Currency (OCC) last month asked seven big banks to examine their foreclosure practices.
The OCC and the Federal Deposit Insurance Corporation are also working with the Fed on its examination.
In addition to probing the banks' handling of foreclosure documents, Fed staffers and other federal agencies are evaluating the potential effects of the foreclosure debacle on the real-estate market and on financial institutions, Bernanke said.
The inquiries come as Bank of America and Ally Financial's GMAC Mortgage have resumed processing foreclosures, after halting them temporarily to review documents.
Both lenders face allegations that employees signed, but didn't read, foreclosure documents that may have contained errors.
Dubious mortgage practices and lax lending standards were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-2009 into the worst recession since the 1930s.
Many Americans took out home loans they didn't understand and bought homes they couldn't afford. As a result, foreclosures have soared to record highs. It's one of the negative forces restraining the economy's ability to get back on track.
Now more than 20pc of borrowers owe more than their home is worth, and an additional 33pc have equity cushions of 10pc or less, putting them at risk should house prices decline much further, Bernanke said. "With housing markets still weak, high levels of mortgage distress may persist for some time," Bernanke warned.