WASHINGTON (CN) – A top Treasury Department official told a government oversight panel on Wednesday that an investigation into reports of faulty mortgage documentation leading to improper foreclosures is turning up no evidence of risk to the larger financial system.
“At this stage there appears to be no evidence that there is systemic risk,” said Phyllis Caldwell, head of the Treasury’s homeownership preservation office at a hearing of the Congressional Oversight Panel, a congressionally appointed panel tracking stimulus funds.
Panel member Damon Silvers, policy director and special counsel for the AFL-CIO, challenged Caldwell’s claim that alleged problems with foreclosure documentation would pose no systemic risk.
Silvers pointed out the recent demand letter sent by the Federal Reserve Bank of New York to Bank of America requesting that the firm repurchase $47 billion in mortgage-backed securities, which it allegedly failed to service properly, at the current market price.
Honoring the request would force Bank of America to take a $23 billion loss, Silvers said, and if the firm honored five such requests, the losses would amount to more than its current market capitalization.
“Do you wish to retract your statement that there is no systemic risk in this situation?” he asked. “Is Bank of America not a systemically important institution?”
Caldwell responded that she never said there was no risk, just that there “didn’t appear to be evidence of a major systemic risk.”
“It is still early,” she said. “We are watching this every day. At this stage there appears to be no evidence that there is systemic risk.”
“It is not a plausible position that there is no systemic risk here,” Silvers said.
Caldwell did not say when the Treasury would reveal the results of its investigations, which it is doing in coordination with 11 government agencies along with state attorneys general.
Caldwell said her office in the Treasury Department, which runs the Home Affordable Modification Program, or HAMP, is making progress toward its goal of helping 3 million to 4 million homeowners avoid foreclosure. She said the program has permanently reduced mortgage payments for 1.3 million borrowers by an average of $500 per month.
The program set a 31 percent affordability level, ensuring that borrowers do not face mortgage payments more than 31 percent of their gross income.
Recently, the Treasury has shifted its focus to unemployed borrowers, hoping to ease pressures on the portion of the 14.8 million jobless that own homes. The nation’s 9.6 percent unemployment rate has persisted for months.
In August, the Treasury started allowing unemployed borrowers to delay foreclosures for three months and claim unemployment benefits as income.
But homeowners still face uncertainties.
Panel member Mark McWatters, an attorney, asked Caldwell how home buyers could be assured they were getting clear legal titles to the houses or know if they were paying the correct lenders.
Caldwell said federal regulatory agencies and state attorneys general were looking at mortgage servicers’ practices in all steps of the mortgage process as part of their ongoing probe, but she acknowledged the apparent problems.
“Certainly home owners reading the news would have reason to be concerned,” Caldwell said.