Bloomberg News, 11.18.2010

The Federal Reserve expects about 4.25 million more foreclosure filings through 2012, and problems with the home-seizure process may threaten the U.S. housing and economic recovery, Fed Governor Elizabeth Duke said in prepared testimony.

“In the end, an overhang of homes awaiting foreclosure is unhealthy for the housing market and can delay its recovery, as well as that of the broader economy,” she said in remarks that will be presented to a congressional subcommittee tomorrow. A copy of Duke’s testimony was posted on the U.S. House of Representatives website.

A report released yesterday by a Congressional Oversight Panel found that irregularities in the foreclosure process may undermine financial stability. Attorneys general in all 50 states opened an investigation last month into whether banks and loan servicers used faulty documents or improper practices to seize homes.

U.S. regulators, including the Fed, expect to complete the on-site stage of their review into foreclosure practices this year and plan to publish their findings in early 2011, Duke said. The Fed estimates that the U.S. will have about 2.25 million residential foreclosure filings this year, and again next year, followed by 2 million more in 2012, she added in the statement to the Subcommittee on Housing and Community Opportunity.

“Financial institutions face a number of risks if inadequate controls result in faulty foreclosure documents or failure to follow legal procedures,” Duke said. “We are gathering information to ensure that the institutions we supervise have adequately assessed these risks and have accounted for them properly.”

The Fed’s “forceful” response to the financial crisis over the past two years, including its purchase of mortgage- backed securities, has reduced mortgage rates and made home loans more affordable, she said.