Federal regulators looking into so-called "robo-signing" practices by mortgage loan servicers found "critical deficiencies and shortcomings" in procedures that in some cases violated state and local laws and regulations, but uncovered only a small number of foreclosure sales that shouldn’t have gone through.

The Office of the Comptroller of the Currency and other federal banking agencies are in the process of finalizing sanctions against loan servicers, the OCC’s Acting Director John Walsh said in Congressional testimony this week.

Federal regulators looking into so-called "robo-signing" practices by mortgage loan servicers found "critical deficiencies and shortcomings" in procedures that in some cases violated state and local laws and regulations, but uncovered only a small number of foreclosure sales that shouldn’t have gone through.

The Office of the Comptroller of the Currency and other federal banking agencies are in the process of finalizing sanctions against loan servicers, the OCC’s Acting Director John Walsh said in Congressional testimony this week.

State attorneys general who are conducting their own robo-signing investigation hope to work with federal agencies to reach a coordinated settlement with loan servicers, the Wall Street Journal reported, citing Iowa Attorney General Tom Miller, who is heading the states’ investigation.

A settlement could result in a surge in bank repossessions and foreclosure sales, particularly in 23 judicial foreclosure states where courts typically oversee the process.

After the robo-signing controversy erupted last fall, foreclosure-related filings dropped below the 300,000-per-month mark in November for the first time in nearly two years, according to statistics compiled by RealtyTrac. But RealtyTrac statistics show filings were already picking up again in January in nonjudicial foreclosure states least affected by the crisis.

Foreclosure sales in five Western states bounced back in January to levels not seen since before the controversy, data aggregator ForeclosureRadar said in its most recent monthly report.

Resolution of the robo-signing crisis could get some homes that are already in the foreclosure process moving through the pipeline again. The good news is that fewer homes are entering the pipeline.

The Mortgage Bankers Association reported this week that the percentage of mortgage holders who were behind on their payments dropped to the lowest level in two years during the fourth quarter of 2010.

Walsh said the OCC, the Federal Reserve Board, the FDIC, and the Office of Thrift Supervision coordinated exams of foreclosure processing procedures at the 149 largest mortgage servicers during the fourth quarter of 2010. The exams included reviews of 2,800 foreclosure cases at various stages in the process.

The exams found "critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party law firms and vendors," Walsh said. "These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole."

By emphasizing timeliness and cost efficiency over quality and accuracy, loan servicers "fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner."

That said, Walsh said investigators found only a "small number" of foreclosure sales that should not have proceeded, either because borrowers were members of the military deployed overseas, had filed for bankruptcy, or been approved for a trial loan modification.

Federal banking regulators are conducting separate investigations of MERSCORP and its wholly owned subsidiary, Mortgage Electronic Registration Systems Inc. (MERS), and Lender Processing Servicers (LPS), which provide support services to mortgage servicers and foreclosure processing.

MERS tracks servicing rights and ownership interests in mortgages in an electronic registry, allowing loans to be bought and sold without recording transfers with county recorders. Lawyers for delinquent borrowers have challenged practices associated with that practice, which has including naming workers handling foreclosure paperwork MERS executives.

MERS this week issued guidance to members encouraging them to "bring foreclosures only in the name of the holder of the note, in the name of the trustee or the servicer of record acting on behalf of the trustee."

MERS said it plans a permanent amendment to its rules so that members will no longer be permitted to foreclose in MERS’ name.

The company also announced that it had won court decisions in Massachusetts and Kansas allowing MERS to hold mortgages as an agent for its members.

But MERS also said a U.S. Bankruptcy Court in New York ruled that MERS did not have such authority, without showing "it was given specific written directions by its principal."

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