Business / Technology

State officials put key players in the foreclosure industry on notice Wednesday that they are investigating fraudulent and unfair business practices that likely affect hundreds, if not thousands, of Washington homeowners in foreclosure.

Washington's attorney general and top financial regulator said they had joined state officials nationwide to investigate whether mortgage servicers have been signing key documents required for foreclosure without confirming their accuracy, a practice dubbed "robo-signing."

Attorney General Rob McKenna also called on all foreclosure trustees — who under state law carry out home foreclosures — to suspend any foreclosures in which there are doubts about who owns the loan in default or whether servicers may have violated state consumer-protection laws.

His office sent a letter to all 52 foreclosure trustees believed to be operating in the state.

"We believe that it is likely that most of them, if not all of them, have been cutting corners," McKenna said.

Without naming names, McKenna said his office is investigating several trustees and seeking the industry's cooperation.

Scott Jarvis, director of the state Department of Financial Institutions, said banks face "considerable" legal exposure if they're not following state law on the foreclosure process.

"Our country cannot afford another hit to our lending and real-estate industries," he said. "It's critical that certainty and accuracy be reflected in our system."

The state officials made their comments as the National Association of Attorneys General announced all 50 states would participate in a multistate investigation of foreclosure practices. Washington state is represented on the executive committee of the group.

Last week, Bank of America said it was temporarily halting foreclosure sales in all 50 states while it reviewed its procedures to make sure the basis of its decisions were accurate. The action by the nation's largest servicer set off moves by several other financial institutions to temporarily suspend foreclosures and review their practices.

JPMorgan Chase said Wednesday it was expanding its review of foreclosure cases to 41 states, going beyond roughly two dozen states where courts supervise home seizures.

McKenna said he didn't have the authority to call for a foreclosure moratorium.

Unlike other states, Washington doesn't require lenders to go to court to foreclose when a borrower defaults on a mortgage. State law empowers foreclosure trustees — attorneys, title companies or corporations with an office in Washington state — to act on a lender's behalf and sell the property to repay what the borrower owes.

Trustees, who are not licensed in Washington, are paid by the lender or servicer for every foreclosure.

If the state finds evidence of lawbreaking, it can pursue trustees under state consumer-protection laws that carry up to a $2,000 penalty per violation, officials said.

Since July 26, 2009, state law has required trustees to identify the owner of the loan and the loan servicer and to provide an address and phone number for the servicer.

The law also requires lenders who sold mortgages between 2003 and 2007 to notify the borrowers of their right to request a meeting — and grant it within 14 days if requested — and to provide toll-free numbers to foreclosure-prevention agencies.

In many cases, these legal requirements are routinely violated, officials said.

"We have found evidence that foreclosure trustees appear to be ignoring laws specific to our state and may be regularly using some of the same questionable practices used by national banks," McKenna said.

There is evidence that employees of foreclosure trustees are signing documents posing as the corporate officer of multiple banks and mortgage servicers, he said, and that notaries are committing perjury by validating those fraudulent signatures.

Also, trustees may be foreclosing on homes when there is no clear chain of ownership for the loan or the lender's secured interest in the property.

During the housing boom, lenders routinely sold mortgages to wholesale lenders or investor pools — and the law requires that there be verified paperwork documenting the chain of these transactions to establish the current owner of the loan.

Because the lending industry didn't properly document these transactions in the first place, some are "reverse engineering" the documents by backdating them, McKenna said.

"It appears that the lending industry was not following the formalities required to assign a loan," said Jim Sugarman, assistant attorney general, in an e-mail. "Instead, they wait until they are ready to foreclose and then create the chain of ownership needed. This can have ramifications for the homeowner if they choose to challenge the loan in court."

Among the 52 trustees who were sent letters Wednesday was Northwest Trustee Services of Bellevue, which conducts thousands of foreclosures annually.

Tor Hagen, a spokesman for Northwest Trustee Services, said his firm had no comment on its business practices or those of the mortgage servicers it contracts with.

Karen Gibbon, a trustee who handles several hundred foreclosures a year, said she hadn't seen evidence of "robo-signing" in her practice.

"I'm not saying the banks shouldn't do this stuff right," Gibbon said. "There may be some defects in someone's foreclosure, but where are we going with it? Most of these people cannot afford to make their payments."

That means they will lose their homes anyway, although it may take several months longer to confirm the paperwork, she said.

Sugarman and David Huey, assistant state attorneys general in the Consumer Protection Division, and Deborah Bortner, director of the Department of Financial Institutions' Division of Consumer Services, will represent Washington in the new multistate group.

Material from The Associated Press was included in this report.

Sanjay Bhatt: 206-464-3103 or sbhatt@seattletimes.com.