Congressional Oversight Panel Takes on the Foreclosure Mess

Sloppy foreclosure paperwork could upset the nation’s housing market and destabilize the economy in general,  according to a report released by the Congressional Oversight Panel.  This group oversees the government bailout and its statement marks the first time a federal watchdog has issued an opinion on the foreclosure issue.  Consumer advocates and financial analysts had previously raised the issue, noting that although the consequences of the foreclosure mess are unclear.  The situation has the potential to impact mortgages that are not in trouble but were securitized and sold to investors.

“Everyone’s very nervous about what’s going to happen,” said an anonymous industry source.  “We have all hands on deck.”  Some lawmakers want to revisit legislation that would allow bankruptcy judges to order lenders to reduce the principal the homeowner owes.  Others favor allowing big banks to spin off their mortgage-servicing operations to avoid conflicts of interest.  “The risk is small that a bill gets through, but we are taking it very seriously,” said another unidentified financial lobbyist.  The dilemma became apparent in recent months as Ally Financial, Bank of America and JPMorgan Chase halted foreclosures as it became clear that many were based on flawed documentation.

The oversight panel also voiced concerns that investors who bought the securitized mortgages could file lawsuits that ultimately might cost banks billions of dollars.  At the same time, the panel said the Treasury Department’s claims that the mortgage situation poses slight systemic risk to the financial system are premature.  “Clear and uncontested property rights are the foundation of the housing market.  If those rights fall into question, that foundation could collapse,” according to the report, which also recommended that the Treasury and Federal Reserve conduct new stress tests on Wall Street banks to gauge their ability to cope with any new upheavals.