COP: Robo-signers may jeopardize 33 million mortgages, securitization
The Congressional Oversight Panel called on the Treasury Department to investigate documentation problems in the mortgage industry. It's a threat, the panel said, that could call into question the validity of 33 million mortgages in a worse-case scenario.
Major servicers such as Bank of America ($13.51 0.08%), JPMorgan Chase ($52.29 -0.01%), Ally Financial's ($25.62 0.05%) GMAC Mortgage and Wells Fargo ($40.20 0%) have begun refiling hundreds of thousands of foreclosure affidavits employees may have signed without a proper review of the documents. Wells said their move was a precautionary one.
In response, 50 state attorneys general offices and 11 federal regulators have launched investigations, along with a slew of lawsuits demanding the banks and their servicing arms prove they have the right to foreclose on a homeowner.
Those 11 regulators, however, have found no evidence of a systemic risk to the broader financial system, according to a Treasury official.
Threat to Secondary Market
According to the COP report, if this documentation problem has spread to the securitization process, banks may not know which mortgages they own.
Securitizing a mortgage loan requires many transfers of title. Any missteps could bring ownership of the loan into question.
The concern, COP says, is that robosigners may prove to be a weak link in the chain of mortgage finance (chart below):
Although some analysts such as Barclays Capital said the problem has not spread to the commercial mortgage-backed securities side, COP, which was designed by Congress to oversee the Troubled Asset Relief Program and the Treasury's response to the financial crisis, said if residential MBS is affected, the results could be catastrophic.
"Clear and uncontested property rights are the foundation of the housing market," the report said. "If these rights fall into question, that foundation could collapse. Borrowers may be unable to determine whether they are sending their monthly payments to the right people. Judges may block any effort to foreclose, even in cases where borrowers have failed to make regular payments."
HAMP Mods in Question
COP even called into question a mortgage servicer's right to grant a modification through the Treasury's Home Affordable Modification Program.
But the Treasury maintains that documentation problems have not plagued HAMP, and has instructed the 10 largest servicers participating in the program to conduct internal reviews.
"We strongly believe that the reported behavior within the mortgage servicer industry is simply unacceptable, and servicers who have failed to follow the law must be held accountable," Treasury spokesman Mark Paustenbach said. "That’s why the Administration has led a coordinated interagency effort to investigate misconduct, protect homeowners and mitigate any long-term effects on the housing market."
The banks, too, are downplaying the potential problems. In the BofA third-quarter earnings conference call, CEO Brian Moynihan told investors that the assessment would only take a "few weeks" to conclude, and in 80% of third quarter 2010 foreclosures, most borrowers hadn't made a mortgage payment for more than a year.
COP admitted that in a best-case scenario documentation problems may "prove overblown." But as the sheer speed of the mortgage market overtook county offices to process the titles, it asked the Treasury to prove how it sees no threat to the system.
"The independent regulatory agencies, the Justice Department and HUD are examining servicers’ behavior, and we will continue to monitor the situation closely," Paustenbach said.
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