Gretchen Morgenson, NY Times

KUDOS to the Congressional Oversight Panel for publishing a thoughtful and thorough report last week on the mortgage documentation mess. It argued that, yes, in fact, these paperwork problems may have significant implications for banks, investors and the stability of the financial system.

Since mortgage paperwork flaws became front-page news this fall, the banks caught in the glare have characterized the problems as technicalities that are easily remedied.

Their responses sound a lot like Mike Wazowski, the assistant scarer in “Monsters, Inc.,” who is reprimanded for not turning in his daily reports. “Oh, that darn paperwork,” he tells his supervisor. “Wouldn’t it be easier if it all just … blew away?”

But the mortgage paperwork problems aren’t blowing away, and the panel report analyzes their implications in fine detail. It also questions the view, held by some overseeing the Treasury Department’sloan modification effort, that mortgage documentation errors have no impact on the program.

Phyllis Caldwell, chief of the Treasury’s Homeownership Preservation Office, articulated the Treasury’s view in her testimony before the panel, according to the report. She said false affidavits and other processing flaws weren’t problematic for the government’s modification plan, known as the Home Affordable Modification Program or HAMP.

Because loan modifications don’t require physical production of a mortgage and note, the Treasury has not been examining whether document flaws have an impact on its efforts, she said.

Ted Kaufman, the former Delaware senator who leads the panel, saw it differently on Thursday. “Financial institutions all say everything is fine, but prudence would dictate that we make sure,” he said. “Not that we don’t trust the banks, but let’s take a hard look at this thing.”

In an interview on Friday, Tim Massad, acting assistant Treasury secretary for financial stability, clarified his agency’s position. “We weren’t saying these problems aren’t serious,” he said. “They are extremely serious, they are clearly widespread, they do pose dangers and they need to be fixed. But based on the evidence today, we didn’t see a systemic risk to financial stability.”

STILL, the oversight report points out problems that arise if servicers modify mortgages under HAMP when they don’t actually have the right to do so.

First, the report said, borrowers may either be granted or denied modifications improperly. And paperwork errors may mean the government is paying modification bounties of $1,500 a mortgage to the wrong banks.

Treasury officials told the oversight panel that if ownership of the mortgage was not properly transferred, the government could claw back incentives paid to the wrong institution.

But such a solution may not be feasible, the report concluded. And even if the Treasury chased down a loan servicer to return the incentive money it received in error, the government would have essentially handed that bank an interest-free loan for the period it kept the funds.

Read more here: http://www.nytimes.com/2010/11/21/business/21gret.html?_r=1