All 50 U.S. states are launching probes into whether banks used shoddy paperwork to force people out of their homes, the latest sign of a burgeoning scandal that threatens to bring parts of the country's housing market to a standstill.
State prosecutors from Alabama to Wyoming said Wednesday they would investigate allegations that key documents used in foreclosures were signed by people who didn't confirm whether the records involved were accurate. Some such "robo-signers" have said they certified hundreds of documents daily, making it impossible to check the information they contained.
"We are in the fourth year of a housing and economic crisis that was brought on by lax practices of the mortgage lending industry," Minnesota Attorney-General Lori Swanson said in a statement. "The latest allegations of corner-cutting and slipshod paperwork are troubling, but perhaps not surprising."
In lawsuits now sprouting across the country, the allegations go even further, claiming that firms specializing in foreclosures engaged in fraudulent practices like backdating documents and forging signatures.
The spreading controversy shows how the effort to flush out the backlog of bad mortgages clogging the U.S. housing market produced an environment where slapdash and possibly illegal practices thrived.
A Florida lawyer representing 3,000 homeowners in foreclosure cases said banks hired people who barely knew the basics of mortgage terminology to oversee the process. In one deposition the lawyer collected, a foreclosure supervisor with Litton Loan Servicing - a unit of Goldman Sachs Group Inc. - couldn't define basic terms like mortgagee, lien, receiver, jurisdiction, or defendant. She testified that she didn't know what the required conditions were for a bank to foreclose. "I don't know the ins and outs of the loan, I just sign documents," she said.
Getting to the bottom of what happened in these foreclosures will take time, which could leave the housing market tangled up in knots. Any large-scale halt to foreclosures, a move some politicians have advocated, would be "very disruptive to the proper functioning of an already weak housing market," said Sam Chandan, chief economist at Real Capital Analytics, a property research firm in New York.
Foreclosed homes represented one in every four sales in the United States in the second quarter of this year, according to RealtyTrac, a real estate data firm. In some states like Nevada and Arizona, such properties dominated the market, accounting for one in every two sales.
Last week Bank of America the largest U.S. mortgage servicer, suspended foreclosures across the country in response to the controversy. Ally Financial and JPMorgan Chase have also frozen foreclosures in some states. JPMorgan said Wednesday that it had identified some issues in its review of foreclosure affidavits but was "pretty comfortable" that its decisions to foreclose had been proper.
In announcing their investigation on Wednesday, top prosecutors in various states vowed that they would move to clear the cloud now hanging over foreclosures as quickly as possible to limit the damage to the housing market.
"The first and foremost thing is to do it right, but we can't sit and do this for weeks and weeks," Florida Attorney-General Bill McCollum said. "It'd be very deadly for Florida's economy."
Some states are taking an aggressive approach. Last week, Ohio Attorney-General Richard Cordray sued Ally Financial, a major mortgage lender, for improper practices in its foreclosure process, charges the firm denied.
In an interview with The Washington Post, Mr. Cordray urged lenders to recognize the seriousness of the situation. "They can't pretend this is a fourth-grade student not quite filling in the oval on a test. This is fraud," he said.
With files from Associated Press and Bloomberg News