Financial crisis could result from mortgage documentation issues

The shadow of a house key falls over a mortgage application form.

The worst may be yet to come for homeowners struggling to pay their mortgage and the banks that issued their contracts.

Pause and consider this: Revelations that big banks allegedly "robo-signed" thousands of home foreclosure documents could lead to another financial crisis -- banks could face billions in loss, the real estate market could bottom-out and efforts to stave off foreclosures could fall flat.

That's the worst case scenario, according to Congressional Oversight Panel leaders, who are charged with monitoring the Wall Street bailout. The watchdog group issued a report Tuesday that illuminates the possibility for a new threat to U.S. economic recovery efforts.

"We could have systemic problems there," former Sen. Ted Kaufman, who chairs the Congressional Oversight Panel. "People could lose faith in the markets themselves."

Employees or contractors of several major banks have testified in court cases that they signed, and in some cases backdated, thousands of certifying documents for foreclosures.

Financial firms that service a total $6.4 trillion in mortgages are involved, the report says. Major banks including Bank of America Corp., JPMorgan Chase Co. and Ally Financial Inc.'s GMAC Mortgage have halted foreclosures at some point because of flawed documents.

Federal and state regulators, including the Federal Reserve and attorneys general in all 50 states, are investigating whether mortgage companies bypassed legally required steps when they took steps to foreclose on homeowners.

"Clear and uncontested property rights are the foundation of the housing market," the report says. "If these rights fall into question, that foundation could collapse."

There are a lot of "ifs" surrounding the mortgage documentation irregularities right now.

On one hand, if banks signed affidavits to cover up that loan officers didn't have the proof to carryout a lawful foreclosure, it could mean housing market disruptions could be greater than those already sustained:

Borrowers may not be able to determine if they're sending their mortgage payments to the right people. Judges may block all foreclosures. Prospective buyers and sellers could be in left in limbo - wondering whether they can safely buy or sell a home, the report says.

And banks could lose billions if they discovered they still owned millions of bad mortgage loans they assumed had been sold off their books.

Or, the whole thing could just be a sloppy paperwork job on the part of a handful of bank employees, the report says.

That's the best case scenario.

The Treasury has claimed that, based on current evidence, mortgage related problems don't pose a danger to the financial system.

"In light of the extensive uncertainties in the market today, Treasury's assertions appear premature," the panel said in its report.

"We're calling on Treasury to ... really take a hard look at this," said Kaufman. Bank regulators should conduct new stress tests on Wall Street banks to measure their ability to deal with a potential crisis, considering they've not done that since 2009, he added.


Marketplace host Jeremy Hobson contributed to this report.

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