Justice Dept. probing foreclosure processes

WASHINGTON (Reuters) - The Justice Department said on Wednesday it was probing reports that the nation's top mortgage lenders improperly evicted struggling borrowers from their homes as part of the devastating wave of foreclosures unleashed by the financial crisis.

Attorney General Eric Holder said the Justice Department would look into media reports that loan servicers improperly have used "robo-signers" to process foreclosure orders, stepping into a controversy that has forced at least three banks to halt eviction proceedings and prompted calls for an industry-wide moratorium on home repossession until the problems are fixed.

The move, coming before November's congressional elections, takes aim at one of the most visible signs of the U.S. economic crisis, which saw hundreds of thousands of families lose their homes.

But it could risk further slowing the fragile U.S. economic recovery, leaving banks unsure about whether they will ever claw back their losses and the struggling housing market overshadowed by a mounting inventory of homes still likely to face foreclosure in future.

House of Representatives Speaker Nancy Pelosi and fellow Democrats wrote to Holder earlier this week asking the Justice Department look into the matter after receiving reports from thousands of homeowners about their foreclosure woes.

Separately on Wednesday, Wells Fargo & Co agreed to pay eight states $24 million after allegations of deceptive marketing practices at its home loan unit. The firm said it would also alter its foreclosure prevention practices that could benefit struggling homeowners by more than $700 million.

The bank's chief financial officer, Franklin Codel, told Reuters in an interview that Wells Fargo Home Mortgage did not cut corners to speed up the foreclosure process, and said he was "confident that the paperwork is being properly produced."

In the aftermath of the financial crisis and ensuing recession, banks are expected to take over a record 1.2 million homes this year, up from about 1 million last year and just 100,000 as recently as 2005, according to real estate data company RealtyTrac Inc.

There has been a push by federal and state officials to suspend foreclosures after reports that banks signed large numbers of foreclosure affidavits without conducting a proper review.

Banks and loan servicers, companies that collect monthly mortgage payments, reportedly have used "robo-signers" -- middle-ranking executives who signed thousands of affidavits a month claiming they were knowledgeable of the cases.

STATES TAKE ACTION

The issue on improper handling of foreclosures came to the fore last month when Ally Financial Inc, formerly known as GMAC, revealed that officials had signed thousands of affidavits without having personal knowledge of the borrower's situation.

Ally suspended evictions and post-foreclosure proceedings in 23 states last month. JPMorgan Chase & Co and Bank of America later said they were suspending some foreclosures in 23 states while they reviewed their practices.

Lenders are scrambling to defend and improve foreclosure procedures under scrutiny in state courts and from regulators.

The foreclosure issue and the battered state of the U.S. housing market have weighed on the Obama administration ahead of the November congressional elections in which the Democrats already face the possibility of big losses.

The administration has a $50 billion war chest to fight foreclosures, but disbursements have been limited because the program is narrowly tailored to help responsible borrowers.

Any broader push to resolve the crisis, such as the wholesale forgiveness of principal debt of struggling homeowners, is unlikely to find support among lawmakers because of the cost and the potential for political backlash from any move seen as rewarding reckless behavior by banks or borrowers.

The focus on bank procedures has thrown a new twist into the saga.

North Carolina's attorney general, Roy Cooper, on Wednesday became the latest state official to ask lenders to suspend home repossessions as he expanded a probe into improper foreclosure processes.

Senator Robert Menendez earlier this week raised the idea of a national foreclosure moratorium, saying it was "simply inexcusable" that proper oversight procedures were not in place for actions that deprived families of their homes.

Menendez and Senator Al Franken, a fellow Democrat, also called for congressional investigators to look into reports of misconduct in the foreclosure practices of Ally, JPMorgan and Bank of America.

Ally Financial and its GMAC Mortgage unit also were targeted by Ohio's attorney general on Wednesday. Attorney General Richard Cordray announced a lawsuit alleging fraud and violations of Ohio's consumer law.

Cordray also said he has sought meetings with Citibank, Bank of America, JP Morgan Chase and Wells Fargo to try to ascertain whether their foreclosure processes include any of the "mass" signing of official papers that are the subject of the suit against GMAC Mortgage.

(Writing by Corbett B. Daly and Andrew Quinn; Editing by Leslie Adler)