"The federal banking agencies are working together to complete an in-depth review of practices at the largest mortgage servicing operations," said Bernanke. "We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures. We take violations of proper procedures seriously."
Bernanke's comments come in stark contrast to the view of some industry insiders. During earnings calls this month, big-bank executives sought to characterize the robo-signing issue as an overblown technicality. They've pointed out that, in many cases, borrowers were more than a year delinquent on mortgages, regardless of whether "i"'s were dotted and "t"'s were crossed by the person who personally reviewed all the loan files.
"I don't think the technical issue is as big a deal," Bank of America CEO Brian Moynihan said on Oct. 19. "The issue of foreclosure is a big deal, and the issue is we have to get on with it because it will restore the health in the market."
JPMorgan CFO Doug Braunstein pointed out that it takes the bank 14 months, on average, to complete a foreclosure sale from the time a borrower first defaults. "In most, if not all instances, over that period of time no principal or interest payments have been made on the mortgage," he added.
Both lenders are in the process of examining hundreds of thousands of potentially erroneous documents. According to a report in the Wall Street Journal, Bank of America found problems with 10 to 25 of the first several hundred documents reviewed. Such issues ranged from an address missing a digit or a misspelling of a borrower's name to lack of signatures or missing files, according to the Journal.
Regulators have come under criticism for allowing the issue to blossom as millions of borrowers fell victim to the economic downturn. The U.S. Treasury Department's Office of the Comptroller of the Currency has been monitoring the situation since it first emerged a few weeks ago, but much of the drama has played out in court.
The GMAC deposition which led to the Ohio AG's lawsuit happened in June while two depositions of Wells Fargo employees occurred in March and in July 2009. In Wells Fargo's case in Washington state, the bank has repeatedly pointed out that Judge Regina Cahan found its processes and procedures to be above-board and dismissed the plaintiff's allegations.
Bair acknowledged that regulators could have done a better job of monitoring the situation - saying there were obvious "warning signs" that standards had been eroding.
"Those signs should have caused market participants and regulators alike to question current practices," Bair said at the event, which was co-sponsored by the FDIC and Federal Reserve. "For example, servicing fees declined significantly over the past several years. We should have been asking how servicers were able to achieve such efficiencies without sacrificing quality. Sadly, those types of questions were not asked."
Bair said that regulators "need to get back to basics" when looking at the firms they cover. She attributed the system's flaws to misaligned incentives - in other words, executives getting paid to take on more risk - as well as implicit government support via Fannie Mae (Stock Quote: FNM
) and Freddie Mac (Stock Quote: FMC
) and the concentration of financial services into "Too Big To Fail" banks.
"As regulators embark on changes to our supervisory programs, we need to get back to basics and spend more time understanding and - where necessary - questioning the business models that drive the earnings and create the risks present in the banking system," said Bair. "The robo-signing controversy underscores just how time-consuming and expensive foreclosure really is for all parties concerned."
She added that, because of how many interested parties are involved, and how pervasive the foreclosure issue has become, regulators and the industry will need to reach a "global solution." She suggested cutting mortgage payments by at least 25% or providing some kind of "safe-harbor relief" for borrowers who still couldn't meet those reduced monthly payments.
Bernanke said that the Fed has been working at the ground-level, via its regional banking arms and market participants, to help homeowners and communities struggling with foreclosure. The Fed is also working in conjunction with the Treasury, Labor Department, FDIC and others to get its arms around the current foreclosure crisis and figure out the best path forward for U.S. housing.
Bernanke noted that, because homeownership is seen as part of the American dream, the government has granted tax incentives, mortgage insurance and other federal perks to encourage purchases. Partly as a result, more than 20% of borrowers are underwater on their mortgages and another 33% have equity cushions of 10% or less, putting them at risk if home prices decline much further.
"As recent events have demonstrated," Bernanke concluded, "homeownership is only good for families and communities if it can be sustained."