It seems no one is going to escape scrutiny now that the 50 state attorneys general and the GSEs are requiring almost every servicer to review their foreclosure processing procedures.
The state AGs and bank regulators banded together to investigate the foreclosure mess that has prompted major servicers to halt foreclosures and REO sales.
The primary focus of this Mortgage Foreclosure Multistate Group is servicers that allowed individuals to sign thousands of affidavits in foreclosure cases without verifying the information.
The multistate group claims these "robo-signings" may constitute a "deceptive and unfair practice in violation of state laws."
Ohio AG Richard Cordray joined the multistate investigation after filing a robo-signing lawsuit against GMAC Mortgage on Oct. 6. Cordray is the only AG to take such an action. He is seeking $25,000 for each violation of an Ohio consumer protection law.
Despite the smack-down, Cordray says he is "not looking to file more lawsuits." He hopes the various parties will find a way to correct these problems.
Iowa AG Tom Miller also wants the investigation to lead to a quick fix of the foreclosure process.
"If we keep cool heads and think about what is right and use some common sense we can work through it. It will be good for everybody, and especially good for the national economy," Miller told CNBC-TV when the multistate group was formed.
But the foreclosure mess may not be limited to robo-signings and other shortcuts that can be corrected quickly.
Amherst Securities Group (ASG) analysts reported that the title transfer process is coming under the spotlight.
The Mortgage Electronic Registration System has expedited the trading of MBS by allowing lenders to re-assign loans without recording the transfers at local courthouses.
"But the necessary paperwork to transfer ownership and establish the legal chain of ownership was often neglected by servicers," ASG said in an Oct. 12 report.
Now, some courts are challenging the servicers' right to foreclose on homeowners.
"To clean up the matter, servicers may need to redocument the transfers and refile the appropriate assignments, presumably at a large cost to the servicers and investors," the ASG report said.
Meanwhile, the Obama administration is concerned that a prolonged halt in foreclosures will delay and hurt the fledging housing recovery. They are fending off requests from Democratic lawmakers and liberal groups for a national moratorium on foreclosures, despite very high levels of foreclosure starts and sales.
The HOPE NOW alliance of mortgage servicers reported 245,000 foreclosure starts and 101,800 foreclosure sales in August before robo-signings became front-page news.
Halting this process would postpone a recovery and put more pressure on banks to modify loans and reduce principal.
But the Obama administration does not want a moratorium. The Federal Housing Finance Agency (FHFA) has instructed Fannie Mae and Freddie Mac servicers to review affidavits before any foreclosure action or eviction.
The GSE regulator wants servicers to proceed with foreclosures when those reviews find no problems.
"Delays in foreclosures add cost and other burdens for communities, investors and taxpayers," the FHFA said.
However, sales of foreclosed properties have run into problems because title insurers don't want to take on the risk.
This problem prompted Bank of America to agree to indemnify a major insurer if the title is challenged due to robo-signings or other improper foreclosure processing practices.
Under the agreement, Fidelity National Financial will defend the new homeowner in court if a foreclosed owner challenges the title. B of A will cover the costs and, if necessary, any damages awarded to the previous owner.
"Bank of America and Fidelity National are taking this step to facilitate the continued availability of title insurance that is vital to the marketability of foreclosed properties," said BofA spokesman Dan Frahm.
The giant bank is seeking similar agreements with other title insurers.
The American Land Title Association (ALTA) has approached the GSE regulator about title indemnifications.
"We will continue to work with federal and state regulators, Fannie Mae, Freddie Mac and lenders to bring certainty to the marketplace," ALTA chief executive Kurt Pfotenhauer said.