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By Dave Clarke and Corbett B. Daly
December 2, 2010 3:40 AM EST
Banks will have to make "significant investments" to clean up foreclosure practices and some lenders potentially face strong pressure from investors to buy back faulty mortgages, a top Federal Reserve official said on Wednesday.
Fed Governor Daniel Tarullo was hesitant to put a number on the potential costs and told a Senate hearing regulators are trying to get a handle on the threat to the financial system.
Tarullo's comments underline the problem banks are facing now as they wrestle with processing billions of dollars of foreclosures: many do not have the technology or personnel in place to follow proper practices, but are reluctant to invest in these areas while profits are under pressure.
Tarullo told the Senate Banking Committee hearing regulators expanded their probe into foreclosure practices after a preliminary review suggested "significant weaknesses" in how banks dealt with millions of troubled mortgages.
"The industry will need to make substantial investments to improve its functioning in these areas and supervisors must ensure that these improvements occur," Tarullo said.
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Regulators and state investigators are probing big mortgage servicers, including Bank of America Corp
Banks are also facing the possibility of greater losses due to demands from investor that they buy back billions of dollars of mortgage bonds, the so-called put-backs, because they misrepresented the quality of the underlying loans.
A congressional oversight panel recently said the banking industry could lose $52 billion from put-backs and some analysts have put the figure at more than $100 billion.
Tarullo said the Fed is following the issue closely.
DRAWN-OUT PROBLEM
Tarullo said the problems with servicers are not close to being resolved and that "we do need more of a national effort to impose standards on everybody."
Regulators have been criticized for not catching the widespread flaws and only learning about them when banks started suspending foreclosures in late September to review their practices. They have since resumed foreclosure sales.
Regulators hope to wrap up their review by the end of the year and publish an analysis in January. State attorneys general have been negotiating a settlement with the major banks and Ally Financial, which may include the banks paying into a fund for borrowers wrongfully evicted from their homes.
But industry analysts have said the put-back risk is the higher potential cost for banks.
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