Banks Struggle to Fix Robo-Signing Scandal

Bank of America (Stock Quote: BAC) has joined Ally Bank and JPMorgan Chase (Stock Quote: JPM) in suspending mortgage foreclosures while it reviews the questionable actions of “robo-signers” – mortgage analysts at big lenders who had credit analysts sign off on foreclosures they never analyzed.

Now the major government-sponsored lenders are forcing the mortgage industry’s hand – and dictating the terms that will hopefully clean up this mess.

And what a mess it could be. The analytical firm Radar Logic is already on record predicting a weakening U.S. housing market. Now the firm says that continuing problems and delays with loan foreclosures would further hurt the housing sector.

In a research report released to the industry web site, Radar Logic says that foreclosure delays would curb one of the industry’s biggest driving forces – the motivated seller. When distressed homeowners have more time to catch up to their loan delinquencies, they’re more likely to fight to keep their homes. But in most cases, borrowers don’t have a good track record of “getting current’ on their home loans even with more time to pay while in foreclosure proceedings.

Says Radar Logic in its report:

A delay in foreclosures could have a lasting positive effect on housing markets if sales of foreclosed homes are put off to a point in the future when the overall economy is healthier, housing demand is greater, and housing markets are better able to absorb the new inventory," the opinion said.

It is equally possible that delaying foreclosures will simply push the economic reckoning further into the future, and any relief in the short term will be offset by pain in the middle- or long-term, with no net benefit to housing markets or the national economy.

But Fannie Mae (Stock Quote: FNM) and Freddie Mac (Stock Quote: FRM) aren’t waiting to see what impact robo-signing will have on the mortgage landscape. The two lending giants are “disturbed by the reports” coming from the foreclosure market, and have asked all of their mortgage service providers to review their foreclosure best practices to ensure they’re in full compliance.

"Freddie Mac is deeply concerned about recent reports that there may be affidavits that were improperly executed in connection with foreclosures. The alleged practices in these reports are clearly not in compliance with Freddie Mac's guidelines and directives to its servicers," said Bruce Witherell, chief operating officer for Freddie Mac, in an Oct. 1 statement.

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