SEC Wants Banks to Divulge Potential Foreclosure Losses

The Securities & Exchange Commission (SEC) is advising banks to divulge their anticipated losses from bad foreclosure documents. Lenders are required to divulge conditions where they “reasonably expect” to have an “unfavorable impact” on financial results, according to a letter posted by the SEC on their website.  SEC posted the letter as a response to “concerns about the potential risks and costs associated with mortgage and foreclosure-related activities.”

Government regulators and the attorneys general from all 50 states are looking into whether loan-servicing firms used irregular practices during foreclosure proceedings.  Those under investigation include robo-signers who did not completely read the documentation before rubber-stamping foreclosures.  According to the SEC, banks should set aside money for possible lawsuits and “other contingencies when it is probable” that they will lose money.  Companies that are unable to estimate potential losses should inform the SEC.

Some of the biggest banks – JP Morgan Chase, Bank of America, Wells Fargo & Company and Citigroup, Inc. – already have invested in a combined $10 billion to cover buybacks, according to SEC spokesman John Nester. Mary L. Schapiro, the chairwoman of the SEC, recently indicated that “whenever there are suggestions that there may have been any kinds of issues with respect to disclosure, misrepresentations or omissions, we are always looking at that kind of conduct.”In other words, disclosures that companies make to their own shareholders will be looked at, as well as what was said about the value of the loans packaged into mortgage-backed securities that were subsequently sold to various investors.