JPM,BAC,THO,WFC,C

CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: JPMorgan Chase & Co. (NYSE: [ JPM ]), Bank of America Corp. (NYSE: [ BAC ]), Thor Industries Inc. (NYSE: [ THO ]), Wells Fargo & Co. (NYSE: [ WFC ]) and Citigroup Inc. (NYSE: [ C ]).

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Here are highlights from Fridaya�s Analyst Blog:

Foreclosure: Pausing and Rewinding

Are we facing the specter of another foreclosure crisis? That is what the decision taken by three major lenders to stall foreclosures would seem to suggest. Hot on the heels of General Motors Acceptance Corporation (aGMACa) Mortgage LCC, JPMorgan Chase & Co. (NYSE: [ JPM ]) and Bank of America Corp. (NYSE: [ BAC ]) have recently decided to rein in their foreclosure activities.

Rampant paperwork lapses in evaluating the authenticity of information provided in the mortgage documents have embroiled these three lenders in a number of lawsuits by homeowners. Investigations by state attorneys general have further added to their woes.

Some of the employees of the lenders in question have rushed through the mortgage documents without properly verifying their information. The verification includes the accuracy of the loan information, including who owns the mortgage.

It is more than likely that other lenders and loan servicers may come up with the similar paperwork flaws. The torrent of resulting lawsuits would then make it difficult to find home buyers in the years to come. This could protract the U.S. housing crisis for several years.

Stalled Before Closed?

In September, GMAC Mortgage first revealed that some of its employees might have slackened their background checks in the foreclosure documents filed in court. As a result, the company has suspended foreclosures until all such documents have been re-scrutinized. GMAC Mortgage is an indirect wholly-owned subsidiary of Ally Financial, one of the largest financial services companies in the world. Ally Financial is the official preferred source of financing for major auto companies such as General Motors Corporation, Chrysler, Saab and Thor Industries Inc. (NYSE: [ THO ]).

Following GMAC, JPMorgan announced the halting of nearly 56,000 foreclosures for the same reason. BofA was next to join, suspending some of its foreclosures. All its suspensions are in 23 states including Connecticut, Florida, Illinois, New York and New Jersey, where foreclosures have to be approved by the court.

In the case of BofA, there could be tens of thousands of cases to be checked, which could take months or even years to resolve. The company has not yet come up with any exact figure stating the number of suspended foreclosures. GMAC has also refrained from stating any figure.

As a precautionary measure, BofA has decided to revise all the affidavits pertaining to the foreclosure cases where the court has yet to give its verdict. JPMorgan and GMAC Mortgage had instead announced that they would amend only those documents that they thought had been improperly done.

The Ones Moving On

In a welcome gesture of commitment, Wells Fargo & Co. (NYSE: [ WFC ]) has expressed confidence in its foreclosure documentation, based on the affidavit procedures and the auditing of its process that it conducts on a daily basis. As a result, the company will not stop its foreclosure process.

The other institution who is confident of its foreclosures is Citigroup Inc. (NYSE: [ C ]). Citi has affirmed that it continuously reviews its document verification processes and provides proper training to its staff, so it has a low exposure to such risks of having to freeze its foreclosure process.

What Went Wrong?

The wide-ranging problems are rising in courts across the nation. The problem intensified because of the negligence of homeowners and lawyers despite their awareness.

The documents have been signed by employees, in some cases without verifying decisive information like previously outstanding amounts of the borrowers. Also, signatures were not reviewed by a notary in many cases. Even when the notarizations took place, it is unlikely that the officials witnessed the signings as per the legal requirement.

Another major problem surfaced when multiple banks claimed that they have the right to foreclose on the same property.

Flawed paperwork also raised questions about the validity of the ownership documents. In many cases, an individual who moved into a house after a payment may not be the legal owner. As a result, mortgage lenders improperly expelled original homeowners from their homes as part of their foreclosure process.

Failure of MERS

The Mortgage Electronic Registration Systems (MERS), created to handle mortgage transfers between member banks, is also facing legal challenges. Several lawsuits filed on behalf of the homeowners assert that MERS was involved in creating false promissory notes and affidavits to be used in mortgage foreclosures.

Dept. of Justice Probe

Earlier this week, the U.S. Department of Justice said that it is inquiring into reports related to the improper eviction of struggling borrowers from their homes. Ahead of the November elections, key members of U.S. congressional banking committees are also probing into the improper foreclosure activities of banks in an effort to control the damage their policy has precipitated.

Political concern over the U.S. mortgage mess is not going to end soon, as many other lenders and loan servicers are likely to register similar problems.

Zooming Out

At a time when the financial and banking sectors are trying to rebuild their images, such irresponsible actions of lenders and servicers are indicative of a bigger mess that might have been swept underneath the carpet. This could even protract the housing crisis in the country for several years.

The failure to make basic civil rights and laws obligatory is primarily responsible for the aggravation of the foreclosure crisis. Despite tight lending regulation and securitization practices, the lack of civil rights enforcement hurled the economy into the foreclosure crisis. The federal authorities should take more stringent measures to mitigate the problems related to the U.S. real estate and lending markets.

Though the lenders are trying to laugh it off as minor paperwork errors, lawyers view the actions as sheer fraud.

The halting of foreclosures is likely to be a further drag on the already tardy economic recovery. However, there is no way to estimate the size of the threat.

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JPM,BAC,THO,WFC,C