Mortgage company probe could force reforms

WASHINGTON – A joint investigation by every state and the District of Columbia could force mortgage companies to settle allegations that they used flawed documents to foreclose on hundreds of thousands of homeowners.

It could take months, at least, for any settlement to be reached. But legal experts say lenders could be forced to accept an independent monitor to ensure they follow state foreclosure laws. The banks could also be subject to financial penalties and be forced to pay some people whose foreclosures were improperly handled.

For banks, “the most efficient way for them to get out from under this is to settle across the board,” said Kathleen Engel, a law professor at Suffolk University in Boston.

Employees of several major lenders have acknowledged in depositions that they signed thousands of foreclosure documents without reading them as required by state laws.

“This is not simply about a glitch in paperwork,” Iowa Attorney General Tom Miller, who’s leading the probe announced Wednesday, said in a statement. “It’s also about some companies violating the law and many people losing their homes.”

At a news conference, Miller said the states might be open to alternatives to financial penalties for the banks. They might, for example, agree instead to have lenders step up their efforts to help people reduce their loan payments so they can avoid foreclosure.

The document problems could prolong the housing downturn if many home buyers become unwilling to purchase foreclosed homes. But for a few months anyway, the problems could help prop up prices, because fewer low-priced foreclosed homes will be for sale.

Analysts don’t expect many people who lost homes to foreclosure to recover them.

In their announcement Wednesday, the state officials said they would review evidence that documents were signed by mortgage company employees who didn’t verify the information in them. They also said many documents appeared to have been signed without a notary public witnessing that signature – a violation of state law.

Attorneys general have taken the lead in responding to the revelations. State officials, not the federal government, enforce foreclosure laws, which vary by state.

The filing of false documents in court can be prosecuted as perjury. Any lawyers involved in improper foreclosures could suffer sanctions or lose their law licenses for unethical activity.

As part of their probe, state officials will be able to issue subpoenas to extract potentially incriminating documents from the industry. Such evidence could be used in lawsuits or to force settlements with lenders.

A key question is whether state investigators can persuade bank employees to divulge some of the industry’s secrets, said Ray Brescia, an Albany Law School professor who has tracked the mortgage crisis. Some mortgage company workers could have a powerful incentive to do so rather than face criminal charges, he noted.

“It’s quite possible that there will be insiders who come forward to reveal the inner workings of these ‘boiler room’ foreclosure mills, which likely won’t be good for the banks,” Brescia said.

A lawsuit that Ohio Attorney General Richard Cordray filed this month against GMAC Mortgage and Ally Financial could preview things to come around the country.

Cordray’s lawsuit seeks to halt potentially illegal foreclosure practices. It also asks that a judge stop sales of any foreclosed homes involving paperwork filed by a GMAC employee who signed hundreds of faulty documents. And it aims to toss out foreclosure judgments on homes that haven’t yet sold.

The Ohio lawsuit also seeks damages for consumers and civil penalties of $25,000 for each separate violation. If similar cases were brought in all 50 states, it could total billions of dollars in damages and fines for lenders and others involved in foreclosures.

The allegations raise the possibility that foreclosure proceedings nationwide could be subject to legal challenge. More than 2.5 million homes have been lost to foreclosure since the recession started in December 2007, according to RealtyTrac Inc.