10/14/2010 01:22 pm ET | Updated May 25, 2011

Insiders Ignored Foreclosure Crisis Signals For Years

Insiders anticipated the current foreclosure crisis years before it struck and now, it seems, it must get worse before it can get better.

System-wide flaws in the mortgage industry mean that bank employees and government regulators saw the current crisis coming, the New York Times reports. In depositions released Tuesday, "foreclosure experts" revealed their profound ignorance of, and lack of experience in, the industry for which they worked. At JPMorgan Chase, these new hires were called "Burger King kids" -- a mocking nickname that predicted the current fiasco.

"We waited and waited and waited for wide-scale loan modifications," FDIC chairwoman Sheila Bair told the NYT. But reforms never came. The framework for a crisis was in place.

In September, banks issued foreclosure filings on 347,420 properties nationwide, an increase of almost 3 percent from August, according to data from RealtyTrac.

Bank of America, JPMorgan Chase and Ally Financial's GMAC -- three of the nation's biggest mortgages servicers -- have halted their foreclosures in many states. Regulators from all 50 states are investigating "deceptive" and potentially illegal foreclosure practices. But Wells Fargo, the nation's second largest mortgage servicer, has said it has no plans for a foreclosure freeze.

The Financial Times, meanwhile, reports it has seen legal documents that show Wells Fargo's process was tainted, like those at other big mortgage servicers, by a "robo-signer," who approved documents without reading them. Here's the FT:

In a sworn deposition on March 9 seen by the FT, Xee Moua, identified in court documents as a vice-president of loan documentation for Wells, said she signed as many as 500 foreclosure-related papers a day on behalf of the bank.

Ms Moua, who was deposed as part of a foreclosure lawsuit in Palm Beach County, Florida, said that the only information she verified was whether her name and title appeared correctly, according to the document....

Ms Moua nevertheless signed affidavits that said she had "personal knowledge of the facts regarding the sums of money which are due and owing to Wells Fargo". The affidavits were used by the bank in foreclosure proceedings.

(Wells Fargo, according to the FT, says its "foreclosure affidavits are accurate.")

The government response to the crisis has been criticized as weak. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, released on Wednesday a "Four-Point Policy Framework" (pdf) to address the foreclosure ambiguities. The document calls for servicers to "review" documents and "confirm" information is correct, and to initiate "remedial measures" in response to any problems. The rules focus on general oversight requirements, without detailing specific strategies for fixing problems. Senator Al Franken (D-Minn.) told the Washington Post that the rules aren't anything new, leaving the system exposed to the same abuses that led to the crisis.

At the end of the document, the FHFA aligns itself with the current White House stance that a nationwide foreclosure moratorium would cause harm. "In the absence of identified process problems, foreclosures on mortgages for which the borrower has stopped payment, and for which foreclosure alternatives have been unsuccessful, should proceed without delay," the document says. "Delays in foreclosures add cost and other burdens for communities, investors, and taxpayers."

Fannie Mae has endorsed the FHFA proposals.