American banks' efforts to foreclosure on millions of delinquent mortgages have been plunged into chaos by a growing scandal over administrative inconsistencies and errors.
North Carolina yesterday joined a number of states pursuing legal efforts to slow the tide of repossessions and protect homeowners from what several attorneys general now say are improper foreclosure procedures. What began as a trickle of stories about unusual administrative practices by lenders and the firms they use to process foreclosure documents, has unleashed a torrent of public and political anger that threatens to derail banks' efforts to recoup losses on delinquent mortgages.
Already, several major banks have suspended foreclosure work in states where a repossession must be approved by the courts, and lawyers are advertising heavily for homeowners threatened with repossession to contact them in the hope of finding flaws in the paperwork that could be used to keep them in their homes.
North Carolina Attorney General Roy Cooper said his office expanded its inquiry into improper foreclosure processes, and asked the state's 15 largest mortgage lenders to suspend home repossessions in the state.
Investigators are particularly concerned that banks have signed large numbers of foreclosure affidavits without conducting a proper review, or ensuring that the foreclosures fully comply with state law, Mr Cooper said. "Foreclosures have to happen when people don't pay, but homeowners deserve a fair shot at keeping their homes when possible."
On Tuesday, Texas Attorney General Greg Abbott wrote to 30 of the biggest lenders demanding they stop evictions and the sale of foreclosed homes until they can provide assurances that they are acting in full compliance with the law.
A record 1.2 million US homes are expected to be taken over by banks this year, up from 1 million last year and 100,000 in 2005,property data company RealtyTrac says.
GMAC, the owner of Ally bank, was the first major lender to suspend large numbers of foreclosures amid concern about legal problems two weeks ago, and JP Morgan Chase and Bank of America followed suit last week.
Investigations have turned up examples where notaries, required to sign off on foreclosure documentation, appear not to have personally or fully read the paperwork, with some signing off automatically or even electronically. Lender Processing Services, a widely used outsourcing company which oversees documentation on behalf of lenders, has seen its shares plunge to a year-low on revelations that documents showed wildly different signatures purportedly from the same notary. It put out a statement on Tuesday defending its practices.
The issue has also become a major political topic, with Nancy Pelosi, Speaker of the House of Representatives, and 30 other Democrat politicians from California, one of the worst hit states in the foreclosure crisis, demanding a federal investigation.
Tom Ice, a Florida lawyer at the forefront of the legal challenges, says the morass has been made worse because of difficulty in determining who owns home loans, thanks to the fact that loans were securitised and then sliced and diced into structured financial products. "This isn't just a procedural technicality, it's exposed the very problem at the heart of the securitisation fiasco, which is no one knows who owns what."