By Richard D. Orol

October 21, 2010

WASHINGTON (MarketWatch) — Consumer advocates and bank executives clashed on Thursday over the financial industry’s handling and the severity of the so-called “robo-signing” crisis that the government says could derail the housing market.

The Federal Reserve Consumer Advisory council meeting convened as the White House and bank regulators have begun to expand their efforts to fight foreclosure fraud after some large institutions admitted they had used the tactic of “robo-signing,” where institutions assign one person to quickly approve numerous foreclosures with only cursory glances at the paperwork to determine whether all the documents are in order.

The White House nonetheless has resisted calls for a national foreclosure moratorium as some lenders, such as Bank of America (BAC 11.50, +0.20, +1.77%)  , have re-started efforts to seize homes. The Obama administration said a national moratorium would threaten a fragile housing recovery. See story on White House view of foreclosure crisis.

Kathleen Engel, a law professor at Suffolk University, said process problems are not new and she hopes regulators investigate the practice she contends many banks employ of outsourcing document preparation in foreclosure cases as a means of “insulating” the institutions from liability.

“I want the regulators to dig deep,” Engel said. “I don’t think outsourcing means the institutions are not responsible.”

However, bank executives at the meeting countered the claims, arguing that problems with robo-signing are being blown out of proportion.

“What happens is that through those anecdotes we make sweeping and broad comments that the system is broken at all the large institutions and that doesn’t help anyone,” said John Carey, chief administration officer of consumer banking in North America at Citigroup Inc (C 4.16, -0.02, -0.50%)  .

“That is harmful for everyone. We have to investigate and get our hands around the true facts. More corrective action is needed; those that have done wrong must be sanctioned, but we shouldn’t place an indictment against the entire system, and that doesn’t help people working in those institutions that are trying to do the right thing,” he added.

Kevin Rhein, vice president, card services and consumer lending at Wells Fargo & Co. (WFC 25.83, -0.08, -0.31%)  , said the San Francisco lende has taken major steps to modify mortgages privately and through the Obama administration’s Home Affordable Modification Program. He pointed out that between January 2009 and August 2010, Wells Fargo has completed 532,600 modifications and 1.8 million refinances to help homeowners. He added that the 88% of Wells Fargo’s modifications have been completed through the bank’s own private programs.

“The last thing we want is to put someone out of their home,” Rhein said. “It is important to understand the extensive work trying to be done here and look at it in totality.”

Maeve Elise Brown, executive director at Housing and Economic Rights Advocates in Oakland, Calif., disagreed, saying the servicer/lender system is “systemically” broken. She said she was worried that the private modifications conducted by big banks will result in high re-default rates by borrowers, and she believed that many of these bank in-house modifications aren’t giving homeowners the interest rate relief they need not to re-default.

Brown and other groups complained that many troubled homeowners are stuck in temporary modifications through the White House program, not knowing whether they will be permitted to qualify for a permanent modification.

“You have a bunch of people in trial modifications left hanging for many months, not knowing what is going on,” she said.

Patricia Garcia Duarte, president of Neighborhood Housing Services, said the number of homeowners the Phoeniz, Ariz.-based counseling service company is assisting that are waiting for a decision on whether they would be approved for mortgage modifications under the HAMP program has gone up.

“Our housing counselors are exhausted,” she said. “It shouldn’t take 15 months in a trial modification to figure out whether a borrower qualifies for a permanent modification. If they are not going to qualify for a modification the sooner they know the better so they can have closure.”

Dory Rand, president of the Woodstock Institute in Chicago, Ill., argued that both HAMP and private modifications aren’t working and that the only way regulators and legislators can get a handle on the growing foreclosure crisis is through legislation dubbed “cram down” that would allow bankruptcy judges to modify mortgages and help troubled homeowners reduce the principal they owe on the loan.

“We need to get to a point where [principal reduction] will happen more frequently,” she said.

In an Oct. 1 report, Amherst Mortgage Insight predicts that if governmental policy does not change, over 11 million borrowers are in danger of losing his or her home.

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