Kansas may join foreclosure-fraud inquiry

Kansas Attorney General Steve Six is expected to address today whether the state will join the burgeoning mortgage fraud case against some of the nation's financial giants.

Gavin Young, a spokesman for Six, said he "expects some news on that case" today, but he declined to elaborate on whether Kansas would become involved.

"Prior to that, I can't comment," Young said. "That story leaked out early."

In at least six states, attorneys general are calling for foreclosure moratoriums and launching their own investigations. And this week, the attorneys general of up to 40 states are expected to announce a joint investigation into banks' use of flawed foreclosure paperwork.

A person briefed on the investigation said over the weekend that an announcement of the 40-state investigation could come as early as today. The person spoke on condition of anonymity because the investigation was not yet public. Iowa Attorney General Tom Miller will lead the investigation.

Allegations of possible mortgage fraud against financial giants GMAC, JPMorgan Chase and Bank of America read like a corporate thriller: forged documents, faked Social Security numbers, phantom titles, disappearing paper trails, "robo-signers" and mortgages sliced and diced so many times that nobody really knows who owns them.

On Friday, PNC and mortgage servicer Litton Loan Servicing joined those three financial institutions in suspending some foreclosures while they review how documents were handled. Bank of America, which had already announced a halt for 23 states, expanded the suspension to cover the whole nation. If other banks follow suit, it raises the specter of a national foreclosure moratorium.

In all, the banks will have to review the paperwork for hundreds of thousands of mortgages to determine, experts said, which lender actually has the legal right to foreclose on mortgages that have been passed around. On top of that, class action lawyers and state attorneys general have filed lawsuits and called for foreclosure moratoriums.

Wichita brokers and analysts are hopeful the scandal won't touch the local market. In September, there were 161 foreclosure sales in Sedgwick County, twice the number of September 2009.

"Thank God for the local banks who do business carefully," said Gary Walker, residential general manager for J.P. Weigand & Sons.

Weigand formed a foreclosure division to handle distressed sales more than a year ago, and Walker said business remains slow.

"I'd say there will be a minimal effect in Wichita," he said. "It's not a major issue in this market."

But Stan Longhofer, director of Wichita State's Center for Real Estate, is less certain about the seriousness of the situation in Kansas, a state that does not require a judicial review before a foreclosure begins.

"We don't have the extensive number of foreclosures that the states have with a lot of subprime lending with adjustable rate features," he said.

"But these are issues that would hit anyone with loans on the secondary market.... The question is can I as a lender demonstrate that I have the legal right to foreclosure on your home? It's not a question of if you're in default, it's a question of who you're in default to."

If the scandal hits Kansas, and if there are significant foreclosure suspensions nationwide, regional housing markets could be hit hard, Longhofer said.

"If this process prevents significant movement through the foreclosure process, it could stymie sales," he said. "If you can't move a house from a distressed to a normal asset, it will hurt markets."

In the near term, the freezes could actually benefit homeowners and the housing market. Homeowners would have time to live rent-free and chip away at their debt. Prices might stabilize because so many homes are penned up.

But the long-term implications are grave. Only a month ago, housing watcher Mark Zandi, chief economist at Moody's Analytics, predicted that a housing recovery would be under way by the third quarter of next year. Now he believes the foreclosure scandal could prolong the housing depression for at least another few years.

This story was originally published October 12, 2010 at 12:00 AM with the headline "Kansas may join foreclosure-fraud inquiry."