Regulators said fixing the foreclosure paperwork mess will take time and could weaken a still-limping housing market, despite banks’ hopes that the problem will soon go away.
Sheila Bair, head of the Federal Deposit Insurance Corp., warned on Monday of broad implications from lawsuits accusing lenders of failing to properly vet foreclosure documents.
"I fear that the litigation generated by this issue could ultimately be very damaging to our housing markets if it ends up unduly prolonging those foreclosures that are necessary and justified," Bair told a housing conference in Arlington, Va.
Attorneys general in all 50 states and bank regulators are investigating whether lenders rushed through foreclosures and evicted borrowers from their homes without properly checking documents, instead using so-called robo-signers.
Lawsuits have already begun to trickle in and banks may also face fines or be forced to repurchase faulty loans, which would hurt profits.
Banks put on a brave face last week — when many of them reported quarterly earnings and faced questions from shareholders about what their liability might be — saying the problem would likely pass quickly with minimal pain.
Bank of America, the largest mortgage servicer nationwide, began on Monday refiling affidavits in 102,000 foreclosure cases in certain states, after having previously announced a nationwide halt on evictions.
The banks’ desire to put the foreclosure paperwork mess behind them will be hindered by the various probes which will last weeks, if not months.
Federal Reserve Chairman Ben Bernanke said bank regulators would issue a preliminary report in November on foreclosure practices at large financial institutions.
"We have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions," Bernanke said on Monday in opening remarks to the housing conference.
Bernanke pledged an in-depth review of the firms, and said regulators are also looking at the effects the paperwork problems could have on the real estate market.
The foreclosure problems have not yet filtered through into economic data on home sales. An industry group on Monday reported that existing home sales rose 10 percent in September, a surprisingly strong bounce back from a summer slump.
"The question remains of the impact of the foreclosure debacle that reared its ugly head in the latter part of September," said Chris Christopher, an economist with IHS Global Insight in Lexington, Mass. "The impact will be felt in the October numbers."
The problem has put a bit of a chill on mortgage applications, which have fallen in the past couple of weeks.
