Analysis: Foreclosure "Mess" Unfolds State By State
But ramifications for federal taxpayers and investors will depend on the costs of clearing up the problem, the latest fallout from the bursting of the nation's real estate bubble.
GMAC Mortgage announced last week that it had suspended evictions and post-foreclosure closings in 23 states due to concerns over paperwork. In order for a lender to foreclose on a property, it must prove that it actually checked the borrower's loan agreements, and that the homeowner defaulted.
But the unit of Ally Financial, which is 56.3 percent owned by the federal government after a $17 billion bailout, said employees preparing foreclosures had submitted affidavits to judges containing information they did not personally verify.
"It's a real mess," said Justice Arthur Schack, a jurist on foreclosure issues who sits on the New York State Supreme Court in Brooklyn.
GMAC's announcement has raised doubts about whether some people lost their homes without good reason. Attorneys general in several states, including California, Colorado, Illinois and Ohio, are investigating.
"The law demands that lenders prove their case in foreclosure actions," Illinois Attorney General Lisa Madigan said last week.
But Ally characterizes the problem as merely technical, arguing that the underlying facts in each foreclosure are accurate.
"We are confident that the processing errors did not result in any inappropriate foreclosures," it said in a statement last week.
GMAC landed in its predicament after one of its employees testified in a December 2009 deposition that he signed off on tens of thousands of affidavits containing information he did not verify.
The company said it has "substantially increased" the number of employees to verify documents, provided additional training, and suspended evictions out of an "abundance of caution."
Ally isn't the only firm under the microscope.
JPMorgan Chase & Co is delaying its current foreclosure proceedings and has begun to systematically re-examine related documents after discovering that some employees may have signed affidavits in some cases without personally reviewing the files.
Lawyers in Florida are questioning JPMorgan's practices after discovering one of its executives did not check the details of its claims against a homeowner.
The executive said she had been part of an eight-person team that signs 18,000 documents a month.
Paul Miller, an analyst at FBR Capital Markets, said he didn't think the foreclosure problems were material enough to impact the timing of any initial public offering that Ally has said it was considering.
Ally spokeswoman Gina Proia said the company does not anticipate a "significant adverse affect" related to the document issues.
But last week Moody's said it may cut some GMAC ratings because case resolutions could take longer than expected, which could mean higher costs for borrowing by Ally.
And Miller said he expects more damaging disclosures across the industry.
"This will have big time legal ramifications throughout the foreclosure market," he said.
Judges across the country have been skeptical about homeowner challenges based on arguments that loans were improperly securitized, said O. Max Gardner III, a bankruptcy lawyer in North Carolina.
But evidence of false affidavits might hit closer to home for judges, Gardner said.
"When you're talking about somebody submitting just a false document to the court, knowing it was false, that is something that any judge can understand," Gardner said.
However, states regulate foreclosures in very different ways.
In some, like New York, judges sign off on foreclosure orders. That gives homeowners an automatic courtroom session to air any complaints, making it easier for document problems to gum up foreclosure proceedings.
But other states hard hit by the housing market collapse, such as California, require homeowners to initiate their own separate legal proceeding to raise problems with their documents, an extra hoop which could dampen the impact of problems.
"In California this has been a huge uphill fight," said Walter Hackett, an attorney who represents homeowners in the Golden State.