US Says Banks May Have Made Foreclosure Mess Worse

Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said in a column on the Huffington Post website that a comprehensive review of the foreclosure crisis was underway and the administration would respond with "the full force of the law where problems are found."

Evidence that many banks failed to review foreclosure documents properly or submitted false statements when they foreclosed on properties is accumulating fast.

In addition to inquiries by attorneys general in all 50 U.S. states, the U.S. Justice Department and banking regulators, the U.S. Securities and Exchange Commission has begun a preliminary investigation.

Federal Deposit Insurance Corp. Chairman Sheila Bair said in an interview on C-SPAN's "Newsmakers" Sunday regulators need to gauge the scope of improper document processing.

"We have been told that this is a process issue -- that all of the information is in the file, the problem is the person who needed to sign the affidavit had not been looking at the file before they'd done so. So we need to independently verify that," Bair said.

"Foreclosure is a very serious thing and it should only be undertaken after loan modification efforts are not feasible, and the files are fully documented,." she said.

Donovan, in his column, wrote: "The recent revelations about foreclosure processing -- that some banks may be repossessing the homes of families improperly -- has rightly outraged the American people."

"The notion that many of the very same institutions that helped cause this housing crisis may well be making it worse is not only frustrating -- it's shameful," Donovan added.

The housing secretary said investigative agencies are sending out a clear message: "Banks must follow the law -- and those that haven't should immediately fix what is wrong."

"Given the problems that have already been found and admitted to by some servicers, the Obama administration fully supports the voluntary moratoria that are already in place and others should they be deemed necessary," Donovan wrote.

"Some have suggested, however, that all foreclosures in every state, under every servicer, should be stopped. But a national, blanket moratorium on all foreclosure sales would do far more harm than good -- hurting homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales," Donovan added.

Bair urged banks to do "rigorous internal analysis" about the range of possible risk exposures in the foreclosure crisis. "We need to get a full handle on all of these issues," she said. "If it turns out this is just a process issue then I don't anticipate the exposures to be significant.

"If it turns out to be something more fundamental then we'll have to deal with that. But I think we need to get all the information before we jump to any conclusions." (Additional reporting by Deborah Charles) (Writing by Thomas Ferraro and Deborah Charles; Editing by Todd Eastham)