US panel warns foreclosure crisis threatens nation’s economy

16 November 2010 15:15  [Source: ICIS news]

WASHINGTON (ICIS)--A congressional panel warned on Tuesday that the foreclosure crisis in US real estate could collapse the housing market and may pose a major threat to the nation’s banking sector and overall financial system.

The Congressional Oversight Panel (COP) said that widespread confusion over the actual ownership of some 33m US home mortgage loans valued at $6,400bn (€4,736bn) calls into question not only foreclosed loans but also pooled mortgages and could undermine the entire national real estate market.

“Clear and uncontested property rights are the foundation of the housing market,” the panel said in a report. “If these rights fall into question, that foundation could collapse.”

The long-troubled US housing market was just beginning what many had hoped would be a slow but ongoing recovery. The housing industry, especially new home construction, is a crucial downstream consuming sector for chemicals, plastics and a broad range of derivative products.

If the fundamental question of which bank owns which pieces of real estate cannot be answered definitively, the panel said, “the housing market could experience even greater disruptions than have already occurred, resulting in significant harm to major financial institutions”.

“For example, if a Wall Street bank were to discover that, due to shoddily executed paperwork, it still owns millions of defaulted mortgages that it thought it sold off years ago, it could face billions of dollars in unexpected losses,” the report said.

The US home loan foreclosure crisis arose in early October when it was disclosed that loan servicing agents at major mortgage banks “testified that they signed, and in some cases backdated, thousands of documents claiming personal knowledge of facts about mortgages that they did not actually know to be true”, the panel noted.

That practice, known as “robo-signing” of foreclosure documents “served to cover up the fact that loan servicers cannot demonstrate the fact required to conduct a lawful foreclosure”, the report said, adding: “In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”

With single mortgage loans sold perhaps dozens of times among various US banks and bundled into investment packages sold internationally, the panel said, it may be impossible to determine exactly who owns what.

“In an extreme scenario, this could call into question the validity of 33m mortgage loans,” the study said.

The panel called on the Treasury Department to conduct a thorough investigation of mortgage banks and urged federal bank regulators to conduct new “stress tests” on Wall Street banks to measure their ability to meet and withstand a new real estate crisis that may be building.

“The American financial system is in a precarious place,” the panel said. “The housing market and the broader economy remain troubled and thus vulnerable to future shocks."

The full report and an executive summary of the panel’s findings are available at the COP web site.

($1 = €0.74)

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