Yesterday, all 50 state attorneys general opened a joint investigation into the ongoing foreclosure fraud scandal that has led some of the country’s biggest banks to suspend foreclosures, as they sort out whether or not they improperly threw borrowers out of their homes. Multiple banks — including Bank of America, JP Morgan Chase, and Wells Fargo — have reportedly had foreclosure documents approved by “robo-signers”: employees who were signing thousands of foreclosure documents a day, without verifying basic information. In many cases, as the Associated Press reported, these employees had no experience with mortgage banking at all. According to employee depositions, “financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in ‘foreclosure expert’ jobs with no formal training.” One bank employee reportedly said, “I don’t know the ins and outs of the loan, I just sign documents.” But the extent of the banks’ problems extends beyond robo-signed paperwork to lost and forged documents and, as Reuters’ Felix Salmon reported, knowingly selling investors mortgage bonds they knew were toxic. “The financial institutions would be well served by working with us to get it cleaned up,” said Ohio Attorney General Richard Cordray. “And they’d also be well served to think about reaching negotiated resolutions with borrowers in cases where they’ve created exposure for themselves by committing fraud upon the courts.”

FRAUDULENTLY FORECLOSING: According to a report from the investment bank Morgan Stanley, “as many as 9 million U.S. mortgages that have been or are being foreclosed may face challenges over the validity of legal documents.” In Florida alone, “a recent sample of foreclosure cases in the 12th Judicial Circuit of Florida showed that 20 percent of those set for summary judgment involved deficient documents.” In other instances, dubious notarizations were used to approve foreclosures (leading President Obama to veto a bill that would have forced every state in the country to accept out-of-state notarizations). At the moment, the extent to which unlawful foreclosures were approved is unknown, but JP Morgan Chase yesterday set aside $1.3 billion to cover potential legal costs stemming from the foreclosure scandal. As the Washington Independent’s Annie Lowery reported, “CEO Jamie Dimon tried to reassure call participants by saying there is ‘almost no chance we made a mistake‘ with foreclosures,” but the bank, in addition to the money to cover legal fees, put $1 billion into its mortgage-repurchase reserves, which it uses “to buy back bad mortgages it packaged and sold to investors or the government-sponsored entities, Fannie Mae and Freddie Mac.” “Every homeowner that’s in foreclosure now should be questioning,” Matthew Weidner, an attorney who defends homeowners in foreclosure cases, told Bloomberg News. “This entire system is now a great big question mark.” The banks’ actions not only call into question the legal status of foreclosures, but undermine due process and the rule of law when it comes to property rights. “In a nation of laws, contract and property rights, there is no room for errors,” wrote The Big Picture’s Barry Ritholz. “So what does it mean if banks have been systemically, fraudulently and illegally undermining this process?”

THE POLITICAL RESPONSE: The White House yesterday signaled its approval of the attorneys general’s investigation, with Press Secretary Robert Gibbs saying, “We’re supportive of getting to the bottom of the process and insuring that these banks are following the legal process for making these decisions.” However, the administration has thus far refused to endorse the idea of a national foreclosure moratorium — suggested by some congressional Democrats — due to the potential for “unitended consequences.” The Federal Housing Finance Agency (FHFA) has also released a four-step plan for banks to follow as they look into their foreclosure processes. “I intend to maintain our focus on addressing this issue in a manner that is fair to delinquent households, but also fair to servicers, mortgage investors, neighborhoods and most of all, is in the best interest of taxpayers and housing markets,” said acting FHFA director Edward DeMarco. While many congressional Democrats have called for investigations into the banks’ actions and a bi-partisan group of attorneys general have called for foreclosure moratoriums in their respective states, Congressional Republicans have been largely silent on the issue. Sen. Richard Shelby (R-AL) is one of the few Republicans to call for an investigation, saying “the regulators should determine exactly what occurred at these institutions and make those findings available to the [Senate] Banking Committee without delay.” Banking Committee Chairman Chris Dodd (D-CT) has scheduled a hearing to examine the banks’ practices for November 16.

DEFANGING THE WATCHDOG?: Could some of these problems with the banks been avoided? Elizabeth Warren, who is heading the newly created Consumer Financial Protection Bureau (CFPB), thinks so, saying “had a similar agency been in place three years ago” this problem could have been nipped in the bud. “Little problems are a lot easier to fix than great big problems,” Warren said. The CFPB will have the mandate “to oversee and write rules for mortgage servicers, though it is not staffed or set up yet,” and having one agency in charge of this will be a distinct improvement, as right now at least four agencies have some jurisdiction over mortgage servicers, with none of them looking out specifically for the interests of homeowners. This lackluster and balkanized oversight of the servicing industry helps to explain why companies passed off bogus paperwork and allegedly committed fraud on the court for as long as they did,” wrote Mother Jones’ Andy Kroll. “This is where a consumer protection bureau dedicated to proactively safeguarding American consumers comes into play.” “Moving forward with the regulations under the Consumer Finance Protection Bureau makes a lot of sense. This is a reminder of why those kinds of rules are necessary,” said Harvard Business School Professor Nicolas Retsinas. But the CFPB may have a hard time getting off the ground, as some Republican members of the House Financial Services Committee have already made clear they want to deny the agency funding. Rep. Jeb Hensarling (R-TX) has announced his intention to defund the agency entirely, as he believes it “assaults the liberties of the consumer.”