The Congressional Oversight Panel has released its November oversight report, ‘Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation,’ in which it reviewed allegations that companies servicing $6.4 trillion in U.S. mortgages may, in some cases, have bypassed legally required steps to foreclose on a home. The report determined that although implications of these irregularities still remain unclear, it is possible that robo-signing may have concealed deeper problems that could potentially threaten financial stability and undermine foreclosure-prevention efforts.
The report divided the ongoing crisis into two scenarios. In a best-case scenario, the panel believed that concerns about mortgage documentation irregularities may have been overblown and the process should resume once invalid affidavits were replaced with properly executed paperwork. In a worst-case scenario, however, the panel feared that loan servicers would not be able to demonstrate the facts required to conduct a lawful foreclosure, resulting in a disruption of the origination and securitization markets while placing further stress on financial institutions.
‘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's announcement of the report stated. ‘The panel urges Treasury and bank regulators to undertake new 'stress tests' to gauge the ability of major financial institutions to cope with a potential documentation-related crisis.’
The panel also recommended that the Department of the Treasury ‘immediately undertake more active efforts to monitor the impact of documentation irregularities on its foreclosure mitigation programs,’ and added that lenders and servicers must not proceed with any foreclosure ‘unless they are able to do so in full compliance with applicable laws and their contractual agreements with the homeowner.’
The full report is available online.
SOURCE: Congressional Oversight Panel