Foreclosure Crisis Pushing Bank Limits: FDIC

WASHINGTON (TheStreet) - The Federal Deposit Insurance Corp. says that many mortgage servicers have "lax foreclosure documentation, ineffective controls over foreclosure procedures, and deficient loss mitigation procedures and controls"

In its "Special Foreclosure Edition" of its Supervisory Insights issued Wednesday, the FDIC added that many players are failing to commit the necessary resources to handle "the rapidly growing volume of mortgage loans in default or at risk of default."

The interagency reviews of the largest U.S. mortgage players, including subsidiaries of Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), U.S. Bancorp (USB), Wells Fargo (WFC), MetLife (MET), PNC Financial (PNC), SunTrust(STI), led to regulatory consent orders against all of the subject institutions, requiring various improvements in loan servicing and foreclosure practices.

FDIC Chairman Sheila Bair

The deficiencies in foreclosure procedures highlighted by the FDIC included "inadequate organization and staffing" of loan servicing staffs, the signing and notarization of documents by staff members who didn't review the materials, and the failure to "conform to state legal requirements." Examiners also found that with sloppy recordkeeping, the large servicers were "undercharging fees as frequently as overcharging them."

The FDIC said the foreclosure processing deficiencies led to "widespread unsafe or unsound operational practices, including missing documents, execution of documents by unauthorized persons, failure to notarize documents in accordance with local law, inaccurate affidavits, and affidavits signed by persons lacking sufficient knowledge of the underlying mortgage loan transaction."

The agency said the consent orders against the large mortgage servicers "did not encompass issues beyond the foreclosure process," and the servicers were therefore required to "undertake a comprehensive third-party review of risk in servicing operations and reimburse borrowers injured by servicer errors."

The regulators also reviewed Lender Processing Services (LPS), which provides foreclosure document services to loan servicers and Mortgage Electronic Registration Systems, or MERS, which "acts as the nominee of original lenders on mortgages and the lenders' successors," and executed consent orders against both, based on "unsafe and unsound practices" that exposed the mortgage servicers to "unacceptable operational, compliance, legal, and reputational risks."

In its discussion on "best practices" for state-chartered banks that weren't subject to the federal review of the large mortgage servicers, the FDIC said lenders should "should avoid unnecessary foreclosures and consider mortgage loan modifications or other workout strategies that are affordable and sustainable," stressing early and frequent contact with borrowers.