Mortgage Foreclosures:

Documentation Problems Reveal Need for Ongoing Regulatory Oversight

GAO-11-649T: Published: May 12, 2011. Publicly Released: May 12, 2011.

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Angela N. Clowers
(202) 512-4010


Office of Public Affairs
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This testimony discusses our work on mortgage servicing issues. With record numbers of borrowers in default and delinquent on their loans, mortgage servicers--entities that manage home mortgage loans--are initiating large numbers of foreclosures throughout the country. As of December 2010, an estimated 4.6 percent of the about 50 million first-lien mortgages outstanding were in foreclosure--an increase of more than 370 percent since the first quarter of 2006, when 1 percent were in foreclosure. Beginning in September 2010, several servicers announced that they were halting or reviewing their foreclosure proceedings throughout the country after allegations that the documents accompanying judicial foreclosures may have been inappropriately signed or notarized. The servicers subsequently resumed some foreclosure actions after reviewing their processes and procedures. However, following these allegations, some homeowners challenged the validity of foreclosure proceedings against them. Questions about whether documents for loans that were sold and packaged into mortgage-backed securities were properly handled prompted additional challenges. This statement focuses on (1) the extent to which federal laws address mortgage servicers' foreclosure procedures and federal agencies' authority to oversee servicers' activities and the extent of past oversight; (2) federal agencies' current oversight activities and future oversight plans; and (3) the potential impact of foreclosure documentation issues on homeowners, servicers, regulators, and investors in mortgage-backed securities. It is based on the report we issued on May 2, 2011, on foreclosure documentation problems that Congress requested.

In summary, until the problems with foreclosure documentation came to light, federal regulatory oversight of mortgage servicers had been limited, because regulators regarded servicers' activities as low risk for banking safety and soundness. However, regulators' recent examinations revealed that servicers generally failed to prepare required documentation properly and lacked effective supervision and controls over foreclosure processes. Moreover, the resulting delays in completing foreclosures and increased exposure to litigation highlight how the failure to oversee whether institutions follow sound practices can heighten the risks these entities present to the financial system and create problems for the communities in which foreclosures occur. As a result, we recommended in our report that the financial regulators take various actions, including (1) developing and coordinating plans for ongoing oversight of servicers, (2) including foreclosure practices as part of any national servicing standards that are created, and (3) assessing the risks of improper documentation for mortgage loan transfers. The regulators generally agreed with or did not comment on our recommendations, and some are taking actions to address them.

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    Priority Open Recommendations:

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