States probe mortgage industry practices

October 13, 2010 4:40 PM EDT

Every U.S. state except one launched a joint investigation into the mortgage industry on Wednesday, a move some experts fear will cause uncertainty and threaten the recovery of the housing market.

The 49 state attorneys general are investigating allegations some banks used shoddy paperwork to kick struggling borrowers out of their homes during a foreclosure crisis that is one of the most visible wounds of the 2007-2009 recession.

"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."

The attorneys general will be looking at the practice by banks and companies that collect monthly mortgage payments of using "robo-signers" -- people who sign hundreds of affidavits a day. It is alleged they did not properly review the documents they were signing.

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The use of robo-signers "may constitute a deceptive act and/or an unfair practice or otherwise violate state laws," the attorneys general said in their joint statement.

Alabama was the only one of the 50 states not to join the investigation and it was not immediately clear why.

The paperwork controversy has refocused attention on the foreclosure crisis just weeks before the November 2 congressional election in which Democrats are predicted to suffer major losses due to voter unhappiness over President Barack Obama's economic policies.

JPMorgan Chase, the second-largest U.S. bank, said on Wednesday it had identified some issues in its review of foreclosure affidavits but was "pretty comfortable" that its decisions to foreclose had been proper.

"We're not evicting people who deserve to stay in their house," Chief Executive Jamie Dimon said on a conference call.

JPMorgan, which posted a higher-than-expected profits on Wednesday, is among three big mortgage servicers to announce a halt to some foreclosures pending reviews.

BAD TIMING FOR BANKS

Bank of America Corp, the largest U.S. mortgage servicer, has temporarily halted evictions nationwide. Other lenders have declared more limited suspensions or left their foreclosure policies in place.

Banks are anxious to resolve the issue as soon as possible. Some real estate agents are reporting that potential buyers are worried about buying bank-owned homes whose provenance could later be called into question.

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