Fed joins foreclosure fray

Raising the pressure on banks, the Federal Reserve is wading into the investigation of whether lenders cut corners and used flawed documents to foreclose on homeowners who were delinquent in payments.

Fed chairman Ben S. Bernanke said Monday that officials from the central bank were examining the banks' procedures to see if they were improperly foreclosing.

Preliminary results of an in-depth review into the practices of the nation's largest mortgage companies are expected to be released next month, Bernanke said in remarks to a housing-finance conference in Arlington, Va. The session was sponsored by the Fed and the Federal Deposit Insurance Corp.

"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," he said. "We take violation of proper procedures very seriously."

At the conference, FDIC chair Sheila Bair said regulators were likely to discover more problems related to loan servicing by some of the biggest banks.

"We are going to get into more and more problems with the issues that are surfacing now on servicing," Bair said.

Resulting litigation could "ultimately be very damaging to our housing markets if it ends up prolonging those foreclosures that are necessary and justified," she said. Bair didn't provide details on what other problems she thought might arise.

Ally Financial's GMAC Mortgage unit, JPMorgan Chase & Co., and Bank of America Corp. are among loan servicers that temporarily halted foreclosures while the companies reviewed their own paperwork. Court documents have showed that employees might have submitted affidavits without confirming their accuracy, a practice that state officials say could amount to fraud.

The central bank's involvement adds weight to federal and state investigations into whether banks used flawed documents.

Attorneys general in all 50 states plus the District of Columbia are jointly investigating whether paperwork and legal procedures were handled properly.

At the federal level, the FDIC the Office of the Comptroller of the Currency, in addition to the Federal Reserve, are conducting examinations. Results of those exams will determine the federal government's next steps, Bair said.

"Ultimately, this problem will require some type of global solution," she said. "In developing that solution, I would suggest that all interested parties consider some type of triage on foreclosures" such as safe harbor relief for vacant properties or interest-rate reductions for borrowers.

Bair said she did not think congressional legislation would be needed to address the issue.

In addition to probing the banks' handling of foreclosure documents, Fed staffers and other federal agencies are evaluating the potential effects of the foreclosure debacle on the real-estate market and on financial institutions, Bernanke said.

He offered a glum assessment of the housing market.

"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," Bernanke said. "With housing markets still weak, high levels of mortgage distress may well persist for some time to come."

Foreclosures are mounting as out-of-work Americans fail to meet monthly payments while growing numbers of homeowners, seeing their home prices slide to less than their mortgage values, also default.