WASHINGTON, DC-If news reports are accurate, state attorneys general and the mortgage lenders are in talks to solve a problem that is threatening to upend the fragile housing markets: the issue of inappropriate foreclosures typified by the term robo-signer.

In truth, there have been other issues with documentation plaguing foreclosures that have also been cited in court cases. Robo-signing--that is, the practice of a bank employee blindly signing document after document about which he says he possesses personal knowledge--though, has become the poster child for these series of questionable practices.

The proposed solution is the creation of a nationwide fund to compensate borrowers who lost their homes in improper foreclosures. There are a number of challenges to this approach, however, starting with who decides which borrowers will be compensated and how much each lender will kick in. It is also understood that mortgage lenders will have to concede more in negotiations with borrowers over modifications to their loans.

Perhaps the biggest challenge is one of definition. Lenders have been adamant in saying they haven’t foreclosed on anyone who didn’t deserve it, but this pat explanation skirts the issue of rule of law. That is, lenders are taking the position that even if they didn’t file the proper paperwork, or properly maintain the chain of ownership as the loan was securitized, they are still in the right because the foreclosed homeowner hadn’t made a mortgage payment for months.

Homeowner advocates, by contrast, say that if the bank didn’t file the proper paper then the foreclosure was illegal--regardless of whether the homeowner was up-to-date on their payments. The courts have been looking at this issue and a number are siding with the homeowners.

Leaving that issue aside, homeowner advocates are taking issue with the banks’ claim that they have not foreclosed on anyone who was legitimately on top of their mortgage. Diane Thompson, with the National Consumer Law Center, told the Senate banking committee that she estimates about 10% of the cases she has handled involved homeowners who were not in default when the bank foreclosed.

Even if this issue is resolved with all of its attendant questions answered, there is another threat to the mortgage industry: the growing number of investor lawsuits levied against mortgage lenders and originators alleging that these institutions knew, or should have known, that the loans they were packaging and reselling were toxic.

Indeed, this week the Congressional Oversight Panel for TARP said that the Treasury Department should implement another round of stress tests for major lenders, this time focusing on the potential costs to financial institutions from these suits.

It is unclear how these issues will be resolved--and the recent House of Representatives’ takeover by Republicans muddies the waters even more. In general, the mortgage industry could be on the hook for billions in buybacks or putbacks--which generally refers to the repurchase by issuers of loans whose nature or handling violated their original terms at par.

One J.P. Morgan survey has estimated the industry’s losses to be between $55 billion and $120 billion. Other industry watchers say it could be even higher. Needless to say, the banks have reserved only a fraction of what they may ultimately have to pay out.

Much, of course, depends on how these suits wind their way through court, which is out of Congress’ hands. Congress, though, could have an indirect impact on these suits, especially if budget-conscious, newly elected Tea Partiers insist on reaping the benefits from such suits.

It has not gone unnoticed that the Federal Reserve Bank of New York was among those investors seeking buybacks from the Bank of America. It will be a tricky dance, though, warns Andrew Raines of Raines Feldman LLP. For the most part, Republicans are favorably predisposed to issues dear to the real estate industry’s heart, he says. “But they are also highly cognizant of the general populist disgust with Wall Street and financial institutions. They do not want to be seen as catering to this group too much.”

 

NOT FOR REPRINT

© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more inforrmation visit Asset & Logo Licensing.