Banks warn of heavy fines from faulty foreclosure practices
February 28, 2011
Major U.S. banks are warning their investors that the banks could be facing large fines and tarnished reputations as a result of federal and state inquiries into whether they mishandled hundreds of thousands of foreclosures last year.
In the wake of a flood of foreclosures, banks are accused of having foreclosed on homeowners who didn't have it coming and for signing off on enormous foreclosure document packages without ever reading them. Meanwhile, customers reported that it was often impossible to talk to anyone associated with their bank to explain their situation in an effort to avoid foreclosure.
Foreclosure-happy
It's still unclear why banks were so eager to foreclose on so many homes that didn't merit foreclosure proceedings. The practice has contributed to a massive inventory of foreclosed homes that has driven down housing prices dramatically in the last three years, hurting banks and mortgage businesses immeasurably.
The practice further eroded the reputations of many banks, that triggered the foreclosure crisis by handing out mortgages to borrowers without fully investigating the customers' ability to make payments. To make matters worse, the mortgages were for homes that were dramatically overpriced.
The banks' practices both before and after the foreclosure crisis are being scrutinized by state and federal regulators, and in filings with Securities and Exchange Commission last week banks such as Wells Fargo, Bank of America and Citigroup hinted for the first time that they are facing steep fines for their misdeeds.
Although current mortgage rates and refinance rates remain low, many home buyers and homeowners have been leery of entering the housing market for fear that the foreclosures will continue to drive down housing prices. Instead, consumers have been socking money away in savings accounts and money market accounts.
Investigations and fines
A task force of federal bank regulators investigating the 14 largest mortgage services has already uncovered a number of problems, including lazy work habits and documentation errors. In addition to any fines that are expected from the probe, banks are also facing demands from private investors who want the banks to buy back billions of mortgages because of improper loan practices.
JPMorgan Chase, Citigroup, Bank of America and Wells Fargo are also facing $42 billion in losses if the two housing finance companies Fannie Mae and Freddie Mac are able to prove that the banks should have to buy back mortgages that did not meet stiff underwriting requirements.
