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Foreclosure probe: Problems aren't 'systemic'

By Jennifer Liberto, senior writer

WASHINGTON (CNNMoney.com) -- A federal probe investigating five large mortgage servicers has found some improper foreclosures, but officials have yet to find systemic, "structural" problems with processing, according to the U.S. Housing Secretary.

Housing and Urban Development Secretary Shaun Donovan, in describing his agency's 5-month probe of Federal Housing Administration-insured loans, acknowledged Wednesday that officials have been aware of problems at some servicers for months. He said his agency will "take actions" against those firms and make sure that homeowners are made "whole" and protected.

However, Donovan declined to give specifics on which servicers are doing a bad job.

Since the mortgage meltdown, FHA-insured loans have made up roughly 30% of new home purchases and 20% of home refinancings.

The Obama administration has been walking a fine line, as banks have voluntarily halted foreclosures in response to cases of improperly foreclosed homes. The White House has called for reviews, but stopped short of a call for a moratorium on foreclosures, even as some states and municipalities have effectively shut foreclosures down.

Donovan said the lack of evidence of widespread structural problems reinforces the Obama administration's decision to oppose a nationwide moratorium on foreclosures. He said the consequences of such a moratorium would be dire since foreclosures make up as much as half of all purchases in some hard-struck states, including Florida and California.

"This is getting the highest attention from the president and the White House," Donovan said. "But we do have concerns that . . .stopping the sale of foreclosed properties has the potential to impact local housing markets."

Pressure has been mounting to figure out whether banks, processors and courts have improperly foreclosed on thousands of homeowners. All 50 states have announced investigations.

Several banks had temporarily frozen their foreclosures while reviewing their handling of the process. Ally Financial, formerly known as GMAC, was the first to stop the clock, admitting that some of its foreclosure paperwork might not have been signed in the presence of a notary public and that the signer might not have fully reviewed the information in the documents.

JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500) both followed suit. Bank of America has since restarted its foreclosure process.

The Wednesday briefing was the first time officials have given much detail about federal reviews of improperly foreclosed homes. The details were pretty vague, since Donovan said the investigations were ongoing. The FHA probe will be completed in nine weeks.

Federal officials said some mortgage servicers didn't follow FHA rules at the start of a foreclosure. For example, servicers are supposed to contact borrowers who don't make mortgage payments and offer them a loan modification or payment plan to allow them to stay in their homes.

Mortgage services found at fault could face fines or lose their ability to work with the Federal Housing Administration.

In addition to the FHA probe, a federal multi-agency task force has turned its focus toward investigating whether crimes have occurred in mortgage foreclosures. They're looking to see whether companies or servicers showed a "criminal intent to take a home," and they're also looking into contracting fraud.

Headed by the Department of Justice, the task force originally came together last November with a mission to investigate white collar financial crimes related to the 2008 financial crisis.

The task force rejiggered its focus to mortgage and foreclosure fraud earlier this year, when it launched a series of mortgage fraud summits that took place in Arizona and California. The task force also includes officials from Treasury, Housing and Urban Development, and the Securities and Exchange Commission.

The task force is also working with state attorneys general in their investigation of a practice dubbed "robo-signing," when bank employees sign foreclosure affidavits without reading the records.

-- CNNMoney.com senior writer Tami Luhby contributed to this report To top of page

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