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.
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 is 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.
Colorado Attorney General John Suthers said his office will serve on the executive committee of the multistate effort.
“Homeowners have a right to know that when their banks or lenders foreclose on their homes that all of the information used in the process is correct,” Suthers said in a statement.
The document problems could prolong the housing downturn if many homebuyers become unwilling to purchase foreclosed homes. But for a few months, 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.
The industry has begun to respond to pressure from state and federal officials. JPMorgan Chase said Wednesday that it would extend its review of its foreclosure cases to 41 states — doubling the number of its cases under review to 115,000. JPMorgan had previously said it was halting foreclosures in the 23 states where foreclosures must be approved by a judge.
This week, GMAC Mortgage, a unit of Ally Financial, said it had hired legal and accounting firms to review its foreclosure procedures in all 50 states. GMAC has halted some foreclosures in 23 states. Bank of America has done so in all 50.
And Wells Fargo has said it would review pending foreclosures for potential defects. Wells says it has discovered no problems.
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.
Denver Post staff writer Aldo Svaldi contributed to this report.
