States launch foreclosure probe

NEW YORK (CNNMoney.com) -- The top prosecutors in all 50 states announced Wednesday a coordinated probe into improper foreclosures by the nation's largest loan servicers, but stopped short of calling for a freeze on all foreclosures.

The group of attorneys general and bank regulators will work to put an immediate stop to improper mortgage foreclosure practices. It will also review past and present practices by loan servicers and come up with potential remedies.

The inquiry will be led by Iowa Attorney General Tom Miller.

"This group has the backing of nearly every state in the nation to get to the bottom of this foreclosure mess, and we plan to work together as thoroughly and expeditiously as possible," said Miller.

Alabama was not included in the original coalition of 49 states, but Attorney General Troy King indicated Tuesday afternoon that his state would end its holdout and join the investigation.

State attorneys general have led efforts to compel loan servicers to institute foreclosure moratoriums after it was discovered that some employees may have signed off on documents without a proper review, a process known as "robo-signing."

Coupled with allegations of improper notarization of documents, robo-signing has left lenders exposed to legal challenges from homeowners who say their loans were improperly handled.

"This is not a gray area. Either our legal requirements for filing foreclosures were followed or they weren't, and we will hold the companies accountable for their systematic violations," New Jersey Attorney General Paula Dow said in a statement.

Loan servicers have responded with a range of measures designed to ensure foreclosures are legal. Some have announced a review of pending cases, while Bank of America (BAC, Fortune 500) has halted foreclosure sales in all 50 states.

On Tuesday, Ally Financial, one of the largest holders of foreclosed loans, said it has hired outside accounting and legal firms to examine its foreclosure procedures in all 50 states.

At least six major loan servicers, including PNC Financial (PNC, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Wells Fargo (WFC, Fortune 500) and Litton Loan Servicing, are reviewing procedures or documents to determine whether shortcuts may have jeopardized the accuracy of foreclosure proceedings.

A total of 1.8 million loans are in foreclosure in 23 states where judges are required to sign off on foreclosure. Another 1.3 million are pending elsewhere in the nation, according to a Morgan Stanley analyst's report.

On Wednesday, JPMorgan Chase said it was in the process of reviewing 115,000 loan files. But CEO Jamie Dimon said the underlying foreclosure decisions were justified.

"We don't think there are cases where people were evicted out of homes when they shouldn't have been," Dimon said during the company's earnings call with investors.

In addition to action at the state level, the Federal Housing Finance Agency on announced Wednesday directed servicers to review documents and remediate problems when found.

The agency, which regulates Fannie Mae and Freddie Mac, also requested that servicers proceed quickly in foreclosure cases where no problem are found, in order to avoid unnecessary vacancies. Fannie and Freddie, which are supported by the government, own or back the vast majority of the country's mortgages.

Some Democratic congressional leaders, including Senate Majority Leader Harry Reid of Nevada, have voiced support for a foreclosure moratorium while an investigation is conducted.

But those Democrats have found themselves at odds with top members of the Obama administration, including Treasury Secretary Tim Geithner, who argue that a nationwide freeze would undermine an already fragile housing market and prolong vacancies.