JPMorgan Chase has temporarily stopped foreclosing on more than 50,000 homes so it can review documents that might contain errors.
JPMorgan's move Wednesday makes it the second major company to take such action this month, underscoring a growing legal problem. The issue could stall an already overloaded foreclosure process.
Still, analysts don't expect the delays to reduce the number of foreclosures over the long run.
"It will probably slow things down for a couple months while these documents are reviewed," said Rick Sharga, a senior vice president at foreclosure listing service RealtyTrac Inc. "It won't stop things."
But if the problems turn up at more of the largest mortgage companies, a foreclosure crisis that's already likely to drag on for several more years could persist even longer.
GMAC Mortgage LLC last week halted certain evictions and sales of foreclosed homes in 23 states to review those cases. The company said it found procedural errors in some foreclosure affidavits.
After GMAC's announcement, attorneys general in California and Connecticut told the company to stop foreclosures in their states until it proves it's complying with state law. The Ohio attorney general this week asked judges to review GMAC foreclosure cases. And in Florida, the state attorney general is investigating four law firms, two with ties to GMAC, for allegedly providing fraudulent documents in foreclosure cases.
The issue is also gaining attention on Capitol Hill. Last week, Rep. Barney Frank, D-Mass. and two other lawmakers wrote to Fannie Mae, urging the government-controlled mortgage giant to stop working with so-called "foreclosure mill" law firms under investigation for document fraud.
"Why is Fannie Mae using lawyers that are accused of regularly engaging in fraud to kick people out of their homes?" the lawmakers wrote.
A Fannie Mae spokesman said the company is reviewing the issue.
JPMorgan acknowledged Wednesday that its employees signed some affidavits about loan documents without personally verifying the files. These affidavits verifies the accuracy of the loan information, including who owns the mortgage.
JPMorgan spokesman Kelly said the bank believes the information in the affidavits is accurate, and that the affidavits were prepared by "appropriate personnel."
The bank asked judges not to enter judgments against homeowners facing foreclosure until it completes its review of the problem. JPMorgan expects the process to take a few weeks.
The way mortgages are packaged and sold to many investors as securities can make it hard to determine who has the right to foreclose on a homeowner.
In some states, lenders can foreclose quickly on delinquent mortgage borrowers. But 20 states use a lengthy court process for foreclosures. They require documents to verify information on the mortgage, including who owns it. Florida, New York, New Jersey and Illinois are the biggest states with this process.
Christopher Immel, a Florida lawyer who represents homeowners, said people who already have lost homes could sue their lender, alleging errors in documents.
In August, a judge in Duval County, Fla., ruled that JPMorgan could not foreclose on two homeowners. The reasoning was that Fannie Mae carried the mortgage on its books and JPMorgan Chase only collected payments on the loan. JPMorgan Chase had identified itself as the owner of the loan.
More lawsuits could come soon.
In May, JPMorgan employee Beth Ann Cottrell said in a deposition that she and her staff of eight signed about 18,000 legal documents a month without reviewing every file. In a similar testimony, GMAC employee Jeffrey Stephan said he signed 10,000 documents a month without personally verifying the mortgage information.
"It's very realistic to believe that this is a standard practice in how they go about foreclosures in certain states," said Immel, whose law firm took Cottrell's and Stephan's depositions.
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