An announcement came Tuesday from a Congressional watchdog group that US banks should undergo stress tests to ensure they have enough money to absorb potential losses stemming from investigations into their foreclosure practices.
The Congressional Oversight Panel, which Congress formed in 2008 to review Treasury's response to the financial meltdown, released a 125 page report outlining recent allegations made against some of the nation's largest lenders that they filed thousands of inaccurate foreclosure-related documents in cases across the nation.
The report warned that if the so-called robo-signing allegations are proven true, the entire financial system could be at significant risk, though the report did acknowledge that the scope and consequences of the controversy are still unknown at this time.
The biggest concern is that banks will be forced to repurchase mortgages that had been bundled and sold in the $7.6 trillion Residential Mortgage Backed Securities market, or RMBS. That could potentially result in massive losses for the banks and a destabilization of the already fragile financial system.
Bank of America has already come under fire from a number of large institutional investors like the Pacific Management Company and the Federal Reserve Bank of New York. Those two firms have accused the bank of mishandling an estimated $47 billion in home loans. Also, prosecutors from all 50 states have launched a joint probe into the forclosure processing practices of the nation's largest loan servicers.
The report did, however, acknowledge the possibility that the robo-signing controversy has been blown out of proportion, saying the full impact of the problem is not yet known. In order to assess the vulnerability of banks, the panel called for regulators to subject the banks to stress tests to ensure they are financially healthy enough to survive losses that would result from a worst-case scenario outcome of the robo-signing investigation.
Stress tests were previously conducted on US banks in 2009 at the height of the financial crisis. But the Federal Reserve and Treasury, who conducted those tests, report that those tests would not ensure that the banks could withstand further losses now.
The panel also criticized Treasury for statements made suggesting that the robo-signing problem does not pose a threat to the overall financial system, calling those statements entirely premature. A Treasury official issued a response saying that the agency is working in collaboration with 11 federal regulators to investigate the problem, but "they have not found evidence to date of a systemic threat to the broader financial system."
In addition, the report raised some concerns over the scandal's effect on President Obama's Home Affordable Modification Program, or HAMP, which is the primary mechanism for hel;ping to prevent foreclosures. Panel members worry that a number of loan servicers dealing with Treasury do not have a legal right to initiate foreclosures, which could jeopardize their ability to grant modifications or demand payments from borrowers.
