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Gov’t Watchdog Says Treasury’s Dismissal of Foreclosure Scandal Is ‘Premature'

The Congressional Oversight Panel, in a new report, warned against downplaying the effect that banks' documentation problems could have on the financial system.

In late October, Treasury official Phyllis Caldwell appeared before the government’s bailout watchdog panel and stated that the foreclosure scandal posed no “systemic risk” to the broader financial system

In its own report released on Tuesday, however, the Congressional Oversight Panel challenged Treasury’s position, asking the department to “explain why it sees no danger.” From the report:

 

Treasury has claimed that based on evidence to date, mortgage-related problems currently pose no danger to the financial system, but in light of the extensive uncertainties in the market today, Treasury’s assertions appear premature.

 

For its part, the Congressional Oversight Panel isn’t convinced that the risks are as small as the Treasury Department and the banks say it is. Here’s how it lays out the best-case, worst-case scenarios:

In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-related affidavits, but the facts underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.

The worst-case scenario is considerably grimmer. In this view, which has been articulated by academics and homeowner advocates, the “robo-signing” of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own. The risk stems from the possibility that the rapid growth of mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership.

Adam Levitin, an associate law professor at Georgetown University Law Center, expressed similar concerns to lawmakers, noting that questions about whether banks properly documented transfers of mortgage ownership could have “dire systemic consequences.”

As we’ve noted, establishing who owns the mortgage loan is key to figuring out who has the right to foreclose. And if this chart is any indication, figuring that out is not a simple task. The blog ZeroHedge, which posted the chart, noted that it took the homeowner more than a year to sort out—and he performs securitization audits for a living. (The American Securitization Forum, an industry trade group, issued a paper this week defending its practices.)

Caldwell, the Treasury’s housing rescue chief, is scheduled to testify tomorrow before House lawmakers in a hearing on robo-signing and issues of mortgage loan ownership.

In a statement to the Associated Press, the Treasury Department said it continues to “monitor the situation closely” and believes that “the reported behavior within the mortgage servicer industry is simply unacceptable.”

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