Regulators Try to Handle Financial Threats of US Foreclosure Problems

US Federal Reserve Governor Daniel Tarullo on Wednesday said federal regulators are now trying to obtain a handle on threats of recent foreclosure problems to the financial system. During the Senate Banking Committee hearing on the alleged mishandling of foreclosure procedures by lenders, Mr. Tarullo told legislators that mortgage banks would need to take significant investments in cleaning up home loans practices and possibly in buying back faulty mortgages.

Observers noted that the comments of the Fed official underline the issues that mortgage lenders face as they handle billions of dollars worth of foreclosures. Mr. Tarullo revealed that most of the banks do not possess the right technology or the right number of personnel to strictly follow proper and ideal foreclosure practices. He added that most of those lenders were reluctant in the past to invest in those areas, because doing so might put profitability under pressure.

Fed has expanded its investigations into basic foreclosure practices of banks following the findings of a preliminary review, which suggested that lenders have weaknesses when dealing with troubled mortgages. Mr. Tarullo recommended that the industry should put substantial amount of investments in improving its foreclosure functions. He asked supervisors to make sure those recommended improvements would take place.

State investigators and regulators are currently looking at foreclosure practices of major mortgage servicers. The investigations look at the practices of JP Morgan Chase & Co, Ally Financial, and Bank of America, among others, which were alleged to have been using so-called ‘robo-signers’ in signing numerous foreclosure documents in as fast as a day without necessary and required legal review.

Market analysts assert that mortgage banks are now also facing the potential of incurring bigger losses, because many of their investors force them to buy back mortgage bonds. Numerous investors want the lenders to buy back ‘put-backs’ worth billions of dollars in an effort to make up for the companies’ misrepresentations of underlying loans’ quality.

An oversight panel in US Congress previously estimated a $52 billion combined loss for the banking industry if it would give in to investors’ demand. Several analysts put the estimated figure at about $100 billion or more.

Senate Banking Committee Chairman, Christopher Dodd, was quoted in an interview that he is thankful it seems that something good would come out from the hearing. The Fed assured the public that it is following this issue more closely.

For more news on the foreclosure housing market, visit ForeclosureConnections.com.