Two Banks Face Possible Foreclosure Fines

Two of the nation's largest mortgage servicers, Bank of America and Wells Fargo & Co., face possible fines for the way they handled the foreclosure process. The two banks revealed that possibility in a filing with the Securities and Exchange Commission (SEC).

Publicly traded corporations are required to report to the SEC any potential event that could adversely affect their profitability.

In its filing, Bank of America said is could face "significant legal costs" while Wells Fargo said penalties "are likely."

Lawsuits and investigations

Both banks have been the targets of lawsuits and government investigations concerning the practice of "robo-signing" foreclosure affidavits. Bank personnel allegedly signed affidavits by the pile and never asked questions. The practice was allegedly kicked off by the financial crisis and the increasing number of borrowers who defaulted on their loans, sending the bank into a never-ending game of catch up.

As a result, the lawsuits allege the bank hired workers with little experience or relevant knowledge -- "what one industry insider characterized as the 'Burger King kids'" -- to prepare documents to be used in foreclosure proceedings, including affidavits that contained "essential allegations" concerning the bank's rights under the mortgages.

In addition to the class action suits filed on behalf of people who lost their homes to foreclosure, all 50 states have joined forces to investigate the matter.

Bank of America stopped foreclosures for a while late last year but has since resumed the process. It says its internal review shows that in nearly every case, the foreclosure was justified.

Loss estimates

In its filing with the SEC, Wells Fargo estimates its potential litigation costs could be $1.2 billion beyond the reserve fund it has already set aside.

Meanwhile, efforts continue at the national level to reach a settlement with all loan servicers who employed robo-signing, and other short-cuts.

The Wall Street Journal quotes people close to the talks as saying the Obama administration is aiming for a settlement that would require major loan servicers to modify more mortgages, including reducing some principal amounts for borrowers in danger of foreclosure.

The Journal puts the size of the proposed settlement at $20 billion, but CNBC reports the settlement talks have stalled because no one can agree on the size and scope of the settlement.