The Obama administration has said it found no sign so far of "systemic" home foreclosure problems that threaten U.S. financial stability or structural problems that could undermine investments linked to mortgages.
But Housing and Urban Development Secretary Shaun Donovan said a four-month probe of big banks' mortgage practices had discovered "significant variation" in compliance with government rules, and vowed to force changes as needed.
"We will not tolerate business as usual in the mortgage market," Donovan told reporters, saying the government would demand banks comply fully with rules requiring them to try and keep borrowers in their homes.
Allegations of faulty foreclosure paperwork and demands that banks buy back billions of dollars in mortgages sold to investors have raised fears that banks face a new wave of difficulties similar to the 2007-2009 financial crisis.
Donovan spoke after huddling with Treasury Secretary Timothy Geithner and top Justice Department official Thomas Perrelli to coordinate regulators' response to a foreclosure mess that some analyst say poses risks to the fragile housing market and the broader economy.
With less than two weeks to go before elections that threaten Democrats' grip on Congress, the administration of President Barack Obama has come under growing pressure to show it is on top of the situation.
The White House faces a delicate balancing act. It wants to show voters it is keeping the heat on financial firms to clean up the foreclosure mess. But it is resisting calls for a nationwide moratorium on evictions, wary of doing anything that could undercut the U.S. economic recovery.
Many mortgage industry analysts believe the foreclosure paperwork problems can be cleared up quickly but say banks face bigger losses from investors who accuse lenders of sometimes misrepresenting home loans underpinning mortgage securities.
A group of eight investors has accused Bank of America of inappropriately pooling certain mortgages into more than $47 billion of bonds. The bank has said it will fight being held responsible for the investors' losses.
Donovan said a separate review of the way mortgage-backed securities are designed has not so far uncovered any evidence of "systemic" problems, though he said the government would continue to look into the matter through the end of the year.
"We have not — and we are continuing our review — we have not to date found any underlining concerns about those structural issues," Donovan told reporters at the White House.
The foreclosure documents fiasco, in which banks are accused of using "robo-signers" to sign hundreds of foreclosure documents a day, has reignited public anger with banks, blamed for helping cause the recent financial crisis and recession.
The government probe of the top five mortgage servicers that began in May, while finding significant differences of performance among mortgage servicers, uncovered no evidence of a system-wide paperwork problem.
"We have not found any evidence at this point of systemic issues in the underlying legal or other documents that have been reviewed," Donovan said.
Treasury Assistant Secretary Michael Barr said this meant there was no threat to the" safety and soundness of the financial system."
Donovan said some servicers have followed the rules and others have not. He said the government would press banks to clear up problems and make affected homeowners "whole."
Donovan did not identify the firms examined but the top five mortgage servicers by market share are: Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and Ally Financial's GMAC Mortgage.
Wells Fargo insisted on Wednesday that its practices were in order.
"We are confident that our practices, procedures and documentation for both foreclosures and mortgage securitizations are sound and accurate," Chief Executive John Stumpf said as the bank reported higher third-quarter earnings.
Wells Fargo said it has seen its number of mortgage repurchase demands fall in the last two quarters.
Larry Fink, chief executive of BlackRock, the world's largest asset manager, said banks may have to buy back bad loans that they packaged into mortgages, but the impact on banks will not be as significant as some investors fear.
Fink said selling in bank stocks this week is "overdone."
But Oppenheimer downgraded Bank of America to "perform" from "outperform," saying the involvement of the New York Federal Reserve in the accusations over its mortgage securities dulled the broker's enthusiasm for the stock.
Oppenheimer said this was likely the opening round in a series of legal battles which could take years to resolve.
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