Big banks have done it again.
Banking institutions may have endangered the stability of our financial system and housing market by improperly processing foreclosures during the recession, the Congressional Oversight Panel announced Tuesday.
In a new report, the panel explores the potential repercussions of banks who used robo-signers to fast-track foreclosure proceedings for millions of mortgages.
The best case scenario, according to the report, is that the processed foreclosures were mostly accurate, despite the improper procedures used by employees. If that proves to be the case, then the foreclosure system will be able to return to normal once the improperly processed cases are fixed.
However, the worst case scenario is that banks decided to fast track mortgages in recent years largely to cover up the fact that they don’t have the necessary materials to process the mortgages correctly because they accepted mortgages more quickly than they could track them.
“The risk stems from the possibility that the rapid growth of mortgage securitization in recent years may have outpaced the ability of the legal and financial system to track mortgage loan ownership,” the panel wrote in the report. “In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”
If this turns out to be true, the negative effects would be widespread.
Confusion about who the rightful owner is of a mortgage could lead to multiple banks foreclosing on the same property, or cause homeowners to remain in limbo about the fate of their property.
Beyond this, it could also destabilize the banks themselves if they discover they technically still own millions of bad mortgages because they processed the foreclosures improperly. And, as previous reports have noted, big banks could end up owing billions from the foreclosure mess, mostly due to mortgage repurchases and legal fees.
While it might be tempting to take pleasure in knowing that banks feel some pain as a result of playing fast and loose with homeowners’ mortgages, this mess could seriously imperil banking institutions, and perhaps the economy as a whole.
“To put in perspective the potential problem, the mortgage-backed securities market totals approximately $7.6 trillion, so irregularities that affect even a small percentage of this market could have dramatic effects on bank balance sheets - potentially posing risks to the very financial stability that the Troubled Asset Relief Program was designed to protect,” the panel notes.
In a strange way then, we could be living through 2007-2008 all over again. The banks are public enemy #1, criticized for destabilizing the market, and potentially in need of another cash infusion. But who would be willing to bail them out this time?
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