Bernanke: mortgage crisis to persist

U.S. Federal Reserve Chairman Ben Bernanke warned Monday that the American mortgage crisis may be far from over.

"With housing markets still weak, high levels of mortgage distress may well persist for some time to come," Bernanke warned.

In a speech to a housing finance conference in Virginia, Bernanke said banking regulators are examining whether mortgage companies cut corners on their own procedures when they moved to foreclose on people's homes.

Preliminary results of the in-depth review into the practices of the nation's largest mortgage companies are expected to be released in November, he said.

"We are looking intensively at the firms' policies, procedures and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bernanke said.

"We take violation of proper procedures very seriously," he added.

The central bank's decision adds weight to federal and state investigations into whether banks used flawed documents to foreclose on homeowners.

The concern is that would-be buyers of foreclosed properties will hold off from purchases, wary of being sued by former homeowners claiming banks made errors when seizing their homes.

In September, the Treasury Department's Office of the Comptroller of the Currency asked seven big banks to examine their foreclosure practices.

The inquiries come as Bank of America and Ally Financial Inc.'s GMAC Mortgage have resumed processing foreclosures, after halting them temporarily to review documents.

Both lenders face allegations that employees signed but didn't read foreclosure documents that may have contained errors.

Tens of thousands of foreclosures halted

Other companies, including PNC Financial Services Inc. and JPMorgan, have halted tens of thousands of foreclosures after similar practices became public.

A large-scale halt in foreclosure proceedings would only delay recovery of the American housing market, James Marple, a senior economist with TD Economics said in a commentary.

While initially it would cause a further drop in home sales and put upward pressure on prices, "this would be unlikely to last as would-be buyers anticipate the potential flood of properties back into the market," he said.

"In all, it would simply forestall the necessary clearing in the housing market from taking place, and add further uncertainty about the recovery."

Dubious mortgage practices and lax lending standards were blamed for contributing to a housing bubble that eventually burst and thrust the economy from 2007-09 into the worst recession since the 1930s.

Many Americans took out home loans they didn't understand and bought homes they couldn't afford.

Now more than 20 per cent of borrowers owe more than their home is worth, and an additional 33 per cent have equity cushions of 10 per cent or less, putting them at risk should house prices decline much further, Bernanke said.