Mortgage Fraud Investigation and other News for Las Vegas Real Estate Blog

by skrasner
(Las Vegas)

Feds probing possible criminal violations in home foreclosure crisis Federal law enforcement officials said Tuesday the probe of potential fraud by financial firms in the foreclosure crisis includes an investigation into possible criminal violations of federal laws.

Two sources familiar with the federal Financial Fraud Enforcement Task Force indicated the multi-agency effort by investigators in the Justice, Treasury and Housing departments would determine whether prosecutors would ultimately pursue criminal or civil penalties -- or both.

The task force has scheduled a meeting for Wednesday at the Department of Housing and Urban Development. Upon conclusion, a briefing is likely at the White House, officials said.

"The administration's Federal Housing Administration and Financial Fraud Enforcement Task Force have undertaken their own regulatory and enforcement investigation into the foreclosure process," White House Press Secretary Robert Gibbs confirmed Tuesday. "We remain committed to holding accountable any bank that has violated the law," he said.

Growing concern over flawed paperwork by banks and other lenders in foreclosure proceedings has prompted growing anger and confusion in the housing market. Some banks temporarily froze foreclosures, but are now indicating plans to resume seizing homes after reviewing new paperwork.

Foreclosures: Next shoe to drop for banks?

Bank stocks have been shellacked lately as investors worry about what impact the foreclosure scandal will have on the results for the nation's largest financial institutions.

Still, some fund managers think the market is overreacting and that the allegations of improper documentation for foreclosures and the resulting delay in some proceedings is not setting the stage for the next Bear Stearns or Lehman Brothers -- i.e. another major banking crisis.

"There have been a lot of shoes to drop for bank stocks in the past few years. We've had enough shoes to take care of a centipede to say the least," said Frank Barkocy, director of research with Mendon Capital Advisors, a money manager that focuses on the financial sector. "But I think the worries about foreclosures may be overdone."

Investors seemed to agree, at least on Monday. The KBW Bank Index rose more than 2% afterCitigroup reported profits that were better than forecasts. Shares of Citi shot up nearly 4%.

Last week, the KBW Bank Index sank nearly 4.5% -- despite stronger-than-expected results from JPMorgan Chase.

The issue with mortgages and foreclosures is a question mark for banks, acknowledged James McGlynn, manager of the Calvert Large Cap Value fund. But he also thinks analysts' earnings estimates for banks have already been reduced enough to factor in more bad news.

"Think about where banks are now versus two years ago. We can deal with this situation," he said. "People are not talking about banks going out of business."

McGlynn owns JPMorgan Chase, Goldman Sachs and Morgan Stanley in his fund. Goldman will report its third-quarter results Tuesday while Morgan Stanley's release is due out Wednesday.

Barkocy added that many banks he's talked to seem to be on top of the foreclosure mess. For that reason, he thinks that the sell-offs in stocks like Citi, Wells Fargo and JPMorgan Chase, which his firm all owns, makes them now "excellent values." Wells Fargo reports its third-quarter results Wednesday.

"So much has been made of the foreclosure problem, but it looks like more of a paperwork issue than a credit consideration," Barkocy said. "From what we're hearing from the banks, this may be a short-term concern, and it's one they think is manageable."

Doug Ober, chairman and CEO of Adams Express, a Baltimore-based closed-end fund that invests in U.S. stocks, also thinks that most of the big banks have ample enough reserves to deal with more foreclosure problems.

Ober owns JPMorgan, BofA and Wells. He did concede that if any of these banks take a hit from the foreclosure scandal, it would likely be BofA.

That's because it's still difficult to know just how many bad loans tied to the bank's purchase of Countrywide are affected. Ober said BofA could be forced to raise more capital if the problems are worse than feared.

"It's a bump in the road. The only question is how big of a bump it is," he said,

It might be lawmakers and regulators who decide how big that bump is. Congress and various bank watchdogs in Washington have stepped up their efforts to rein in reckless behavior by financial institutions as a result of the credit crisis.

So it's altogether possible that even if the banks declare that they have a handle on the foreclosure problem, lawmakers in D.C. and state attorneys general may not care.

"The biggest risk right now is regulation and a possible moratorium on foreclosures," said Joseph Mason, a professor of finance at Louisiana State University. "If you have regulatory action, it will become a guessing game as to when the moratorium will end. It would be like the Gulf deepwater drilling ban for the banking industry."

However, what's most interesting about the recent bank bloodbath is the fact that the broader market has turned a blind eye to it. The S&P 500 actually rose about 1%. Tech stocks, for example, surged Friday on the back of robust earnings from Google even as bank stocks plunged.

So even if banks continue to get hit on more headlines about sketchy foreclosure practices, the entire market may not be doomed.

"This is not your average recovery because banks have been so flushed down the toilet. The market could hold up well if banks struggle. Earnings have been pretty good," Ober said.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

Housing mess: You can't stay if you don't pay
Just because a lender screwed up your foreclosure paperwork doesn't mean that you get to stay in your house for free.

Of course, plenty of enterprising lawyers will try to tell distraught homeowners otherwise.

But the best that most delinquent borrowers can hope for is that the current flap over foreclosure documents will prompt financial institutions to grant more affordable loan modifications, experts said.

Even if the banks didn't have the paperwork required to foreclose, "that doesn't mean you'll get a free house at the end of the day," said Ira Rheingold, head of the National Association of Consumer Advocates. "There is no panacea here."

The nation's largest servicers, including Bank of America and JPMorgan Chase, are currently reviewing their foreclosure paperwork and practices after court proceedings revealed major problems. Some banks were having employees sign thousands of documents a month without reviewing their content, while others never filed the proper notices to update a mortgage's ownership in the public records after it was securitized.

Federal regulators are now requiring servicers to clean up the mess, while attorneys general are investigating their practices. Several institutions have halted foreclosure proceedings and sales until their reviews are completed.

Meanwhile, lots of lawyers are trying to capitalize on the confusion by promoting their foreclosure rescue services to troubled borrowers. But homeowners should beware of scams, Rheingold said, because if you can't make your payments, they ultimately can't help you.

Anyone who's behind on their mortgage needs to recognize their ability -- or lack thereof -- to make their payments, he said. Homeowners who are unemployed, or who just don't have the money to catch up, should call a housing counselor or legal aid attorney to find the best way out of the house.

"Unless you fix the underlying economic issue that got you into foreclosure, not much has changed with the document flap except you'll get more time," said Doug Robinson, spokesman for NeighborWorks America, a housing advocacy organization.

But homeowners who can afford a reduced payment might be in luck. The current spotlight on foreclosure practices may make servicers more inclined to negotiate a loan adjustment. Under the circumstances, they may find it cheaper and faster to adjust a mortgage than to straighten out all the documentation and foreclose.

Indeed, servicers have completed 1.3 million modifications so far this year, but consumer advocates say they could be doing much more. All told, there are 3.1 million loans in foreclosure, according to a Morgan Stanley analyst report.

"The paperwork problems will create an added incentive for the banks to consider loan modifications," said Kathleen Engel, Suffolk University law professor and co-author of the forthcoming book "The Subprime Virus."

The temporary freeze that some banks have placed on the foreclosure process gives homeowners time to press for a modification or to find a job so they can afford their current payments. Their first stop should be a housing counselor, who can provide free assistance in negotiating with the banks.

"All the foreclosures that are happening are not inevitable," said Alan White, a law professor at Valparaiso University.


Sarah Krasner
Business Development
Direct Title Inc.

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