The foreclosure mess threatened to become full-blown chaos Friday as the nation's largest bank, Bank of America, halted all foreclosure procedures nationwide, raising the pressure on other lenders to do the same.
Bank of America is the first U.S. bank to institute a nationwide moratorium on foreclosures as anger grows at how lenders have prepared documents to support evictions. The halt on foreclosures will take effect on Saturday and also includes sales of foreclosed property.
Separately, PNC Financial Services Group Inc. said it was halting most foreclosures and evictions in 23 states for a month so it can review whether documents it submitted to courts complied with state laws.
An official at the Pittsburgh-based bank confirmed the PNC decision, which was reported earlier by the New York Times. The official requested anonymity because the decision hasn't been publicly announced.
The moves come amid mounting political pressure on big U.S. banks to examine foreclosure-documentation problems. Bank of America's decision comes amid revelations that the banking industry had used "robo-signers," people who sign hundreds of documents a day without reviewing their contents, when foreclosing on homes.
In a statement released Friday, Bank of America said it will stop foreclosure sales until “our assessment has been satisfactorily completed. Our ongoing assessment shows the basis for foreclosure decisions is accurate. We continue to serve the interests of our customers, investors and communities. Providing solutions for distressed homeowners remains our primary focus.”
Bank of America spokesman Dan Frahm said the company is reviewing its entire foreclosure process but is focusing on the validation of signatures on foreclosure documents.
Bank of America will continue to track late payments and pursue delinquent borrowers but will stop short of foreclosure on those mortgages held on its books -- about 20 percent of the home loans it services.
Frahm said the average foreclosed borrower has not made a payment in 18 months. He declined to disclose how many foreclosures would be affected by the move.
Ally Financial's GMAC Mortgage unit and JPMorgan Chase announced similar moves to review their books in the past two weeks.
Also Friday, Litton Loan Servicing LP, a smaller mortgage company based in Houston, halted some foreclosures and evictions so it could review its handling of foreclosures. It made the disclosure in an e-mail to The Associated Press and did not say which states are affected.
Litton, owned by Goldman Sachs Group Inc., is a mortgage servicer. It collects payments but doesn't make loans.
On Thursday, President Barack Obama refused to sign proposed legislation that would have made it more difficult for homeowners to challenge documents in a foreclosure.
The Senate Banking Committee will hold hearings after next month's elections to look into allegations that the nation's largest lenders have improperly foreclosed on struggling borrowers.
"American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud," outgoing panel Chairman Christopher Dodd said in his announcement of the Nov. 16 hearings.
The hearings would take place during a "lame duck" session of Congress after the Nov. 2 elections where Democrats are expected to face heavy losses at the polls. The new members would not take office until next year.
At issue is the validity of a system banks and other lenders use when they move to foreclose on a mortgage and seize a property. Rather than presenting an entire set of documents in court, the lender typically submits an affidavit establishing their claim signed by an employee who has reviewed the file.
The validity of that process has been successfully challenged by attorneys representing homeowners facing foreclosure. Last month, GMAC said it was halting foreclosure sales and evictions after an employee admitted in a deposition that he had signed 10,000 documents a month without personally verifying the mortgage information. JP Morgan Chase put 50,000 foreclosures on hold after one of its employees made a similar admission.
Bankers argue that the flawed review documents don't undercut their original foreclosure claim, which they say can still be established by providing the full documentation. But given the large number of foreclosure cases in the pipeline, a full review of every case could be very costly.
"Banks realize that it's going to be really hard to prove, and it's going to be really expensive to review all the documents and make sure they are doing it right," said Andrea Bopp-Stark, a Maine attorney who was involved in the case challenging GMAC's foreclosure process.
The unraveling of the mortgage paper trail could be costly for more than just lenders trying to foreclose on a home. Difficulty establishing the legal title to a mortgage could also create headaches for companies that wrote title insurance on the property.
"If it turns out these are mistakes in who owns (the mortgage), the claims against the title insurance industry could be overwhelming," said Kathleen Day, a spokeswoman for the Center for Responsible Lending, which has joined a suit against GMAC and has called for a nationwide moratorium on foreclosures.
Lenders aren't the only ones facing headaches if they can't properly establish ownership of a mortgage. During the height of the boom, millions of mortgages were pooled in trusts that issued bonds backed by monthly payments from those mortgages.
Attorneys working on behalf of homeowners have also been challenging the legal validity of the Mortgage Electronic Registration Systems, or MERS, an industrywide system created to consolidate the process of transferring mortgages. By naming MERS as the "nominee" for the lender in original loan documents, the system speeds the sale of mortgages by replacing the more costly paper trail required to record the transfer directly in courthouses or local governments.
But judges have recently been siding with homeowners' attorneys, who argue that MERS doesn't have the legal authority to sell a mortgage.
"They don’t have standing to assign (the mortgage), they only have the ability to record the mortgage," said Bopp-Stark. "You take that a step further and you can challenge their ability to transfer a mortgage."
If that legal theory holds, the entire food chain of mortgage finance could be called into question — including the value of bonds backed by mortgages. MERS tracks more than 65 million U.S. mortgages and continues to log transfers underlying the mortgage-backed securities market.