Bernanke: Federal Regulators Looking Into Foreclosure Mess

WASHINGTON (AP) — Federal banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes, Federal Reserve Chairman Ben Bernanke said Monday.

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, Va.

"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 violation of proper procedures very seriously," he added.

The central bank's decision adds weight to federal and state investigations into whether banks used flawed documents to foreclosure on homeowners.

Attorneys general 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 last month asked seven big banks to examine their foreclosure practices. The OCC and the Federal Deposit Insurance Corp. 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 Federal Reserve oversees bank holding companies — typically Wall Street's biggest banks — including Citigroup, Bank of America, JPMorgan Chase & Co., and Wells Fargo.

The inquiries come as Bank of America and Ally Financial Inc.'s GMAC Mortgage have resumed processing foreclosures, after halting them temporarily to review documents. Both lender face allegations that employees signed but didn't read foreclosure documents that may have contained errors. Other companies, including PNC Financial Services Inc. and JPMorgan, have halted tens of thousands of foreclosures after similar practices became public.

The federal agencies have a range of options at their disposal. They include issuing a "cease and desist" order requiring a company to stop engaging in a specific practice. They can impose fines on the companies. Agencies also can take less drastic actions, such as crafting a plan with the company to fix any problems.

Bernanke didn't provide details in his speech.

According to people familiar with the examination, the banking agencies are looking into whether companies had controls in place when foreclosure documents were signed, what procedures were in place to proper handle documents, and whether employees involved in the foreclosure process were adequately trained.

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 that they didn't understand and bought homes that 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 sounder footing.

Now more than 20 percent of borrowers owe more than their home is worth, and an additional 33 percent have equity cushions of 10 percent 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 well persist for some time to come," Bernanke warned.