WASHINGTON — The uncertainty over the legal status of foreclosed homes in the nation could further depress home prices and delay the recovery of the housing market, the Obama administration said on Wednesday. þþThe warning came at the first Congressional hearing since the magnitude of the problem gained wide attention. Distressed properties make up one quarter of all home sales. þþRevelations about paperwork shortcuts and so-called robo-signed affidavits, as well as the likelihood of protracted legal battles by homeowners and inquiries by state and federal officials, will hinder foreclosure proceedings and discourage prospective buyers, a Treasury Department official said. þþ“Together, these two factors may exert downward pressure on overall housing prices both in the short and long run,” said the official, Phyllis R. Caldwell, chief of the homeownership preservation office at the Treasury. þþMost at risk, it appears, are communities in the states with the greatest concentrations of foreclosures — led by Nevada, Florida, Arizona and California — where the turnover of vacant properties could screech to a halt if a joint investigation being conducted by all 50 states, and reviews by the Obama administration and regulators like the Federal Reserve, uncover additional wrongdoing. þþThe administration’s testimony did little to soothe members of the Congressional Oversight Panel overseeing the Troubled Asset Relief Program, the 2008 bailout, who said the bungled foreclosures could set back the nation’s fragile economic recovery. þþ“If investors lose confidence in the ability of banks to document their ownership of mortgages, the financial industry could suffer staggering losses,” the panel’s chairman, Senator Edward E. Kaufman, Democrat of Delaware, told Ms. Caldwell. “The possibility is especially alarming, coming so soon after taxpayers spent billions of dollars to bail out these very same institutions.” þþAnother panel member, Richard H. Neiman, the New York State banking superintendent, asked, “How do we continue to look homeowners in the eye and ask them to continue to work with their servicers given the latest news pertaining to faulty documents and fraudulent affidavits?” þþWhile banks and mortgage servicers are bracing for a wave of lawsuits over flawed paperwork, Ms. Caldwell said the government believed the overall risks to the financial system were slim. þþ“We’re very closely monitoring any litigation risk to see if there is any systemic threat, but at this point, there’s no indication that there is,” she testified. þþOther witnesses were less sanguine, telling the panel that financial institutions like Bank of America, the nation’s largest consumer bank, had understated the dimensions of the problem. þþKatherine M. Porter, a law professor at the University of Iowa and an authority on mortgage servicers, said it was likely that “a very large number — perhaps virtually all — securitized loans made in the boom period in the mid-2000s,” contained serious paperwork flaws, did not meet underwriting standards or have not been serviced properly in foreclosure proceedings. þþ“Mortgage servicing is a high-volume industry,” Professor Porter testified. “Its personnel have relatively little training, weak supervision and are under pressure to cut costs and boost profits.” þþAlong with Bank of America, GMAC Mortgage, JPMorgan Chase and the PNC Financial Services Group have suspended some foreclosure proceedings since late September, though some institutions have resumed them. The industry has maintained that the mistakes were limited in scope and under control, but Professor Porter said they should be “treated as part of a pattern or practice of illegal behavior and not as isolated incidents.” þþProfessor Porter said litigation was emerging along two fronts: homeowners are contesting foreclosures, and investors are charging that shoddy loan originations or servicing have increased their losses. These investors are trying to force banks to buy back or repurchase loans that were packaged and sold as investments. þþGuy D. Cecala, chief executive of Inside Mortgage Finance, which publishes newsletters and research for the industry, said that most mortgage executives believed the problems “are largely procedural and can be corrected fairly quickly.” þþHowever, he acknowledged that the industry’s view could be wrong. “The risk is that some of the investigations now under way uncover criminal misconduct or large-scale errors that force foreclosures to be put on hold for an extended period of time,” he said. þþJulia Gordon, a lawyer at the Center for Responsible Lending, a nonprofit consumer group, said that buyers had “become skittish” about so-called real-estate-owned properties, which sit on a bank’s books after an unsuccessful foreclosure auction, because they thought that the title to the home might not be good. þþ
Source: NY Times
