Bernanke says banking regulators are investigating foreclosure practices

The Federal Reserve chairman says the review is ‘seeking to determine whether systematic weaknesses are leading to improper foreclosures.’

By Jim Puzzanghera, Los Angeles Times October 25, 2010

Reporting from Washington

Federal Reserve Chairman Ben S. Bernanke said Monday that banking regulators have been concerned about “reported irregularities in foreclosure practices at a number of large financial institutions” and are conducting an in-depth review.

“We are looking intensively at the firms’ policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures,” Bernanke said in prepared remarks to a housing finance conference in Virginia hosted by the Fed and the Federal Deposit Insurance Corp. “We take violations of proper procedures seriously.”

Bernanke said preliminary results of that probe are expected next month. In addition to the investigation, the Fed and other banking regulators are looking at the potential effects of the mortgage paperwork problems on the real estate market and financial institutions.

The regulatory review comes as the Department of Housing and Urban Development, the Treasury Department, the Justice Department and other agencies are conducting their own comprehensive review of botched foreclosure paperwork. HUD Secretary Shaun Donovan said last week the review would not be finished until the end of the year, but so far the agencies had found the problems do not pose a “systemic” threat to the financial system.

Attorneys general in all 50 states also are conducting a joint investigation into how lenders have verified foreclosure documents.

But federal officials have resisted calls for a nationwide moratorium on foreclosures as the various investigations continue, arguing that could do more harm to the fragile real estate market than good.

Bank of America last week ended its self-imposed moratorium on foreclosures in 23 states but said it was still reviewing its actions in California and 26 other states to make sure they complied with states’ laws. Ally Financial Inc., formerly GMAC Inc., also has resumed some foreclosures after its own moratorium.

Bernanke said Monday the ongoing foreclosure crisis, triggered by the bursting of the real estate bubble, has caused “tremendous upheaval in housing markets.”

“Now, more than 20 percent of borrowers owe more than their home is worth and an additional 33 percent have equity cushions of 10 percent or less, putting them at risk should house prices decline much further,” he said. “With housing markets still weak, high levels of mortgage distress may well persist for some time to come.”

The Fed has been trying to stabilize the housing finance market by purchasing mortgage-backed bonds, helping keep interest rates at historic lows.

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