Former economic adviser proposes solution to foreclosure crisis

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Former White House housing finance issue adviser Peter Swire proposed that senior bank officials personally vouch for the quality of their banks’ mortgage documentation process. Swire, now a law professor at Ohio State University, based his proposal on the Sarbanes-Oxley Act, which required certain disclosures to restore faith in financial statements after the Enron and WorldCom scandals.

October 21, 2010

Former White House housing-finance issue advisor Peter Swire proposed that senior bank officials personally vouch for the quality of their banks’ mortgage documentation process. Swire, now a law professor at Ohio State University, based his proposal on the Sarbanes-Oxley Act, which required certain disclosures to restore faith in financial statements after the Enron and WorldCom scandals.

According to a report in the Wall Street Journal, the proposal calls for a certification process in which senior bankers sign to take responsibility for a bank’s documentation system. Bankers would have good incentive to sign, since refusing could ignite further skepticism by regulators and the public. Swire indicated that the certification, and the act of bankers taking a personal responsibility for the bank, could help to bring an end to the foreclosure crisis.

“When there’s a lot of uncertainty and one party knows more than the others, that party is probably the best one to take on the risk,” Swire said in the report. “Banks probably know more than anyone else about what the risks are; they are the best insurers here against this risk.”

Although some industry officials are not convinced Swire’s proposal is the solution to the foreclosure crisis, Bank of America Corp. made an agreement with Fidelity National Financial Inc., the nation’s largest title insurer, which follows the proposal’s ideas. In the deal, Bank of America agreed to provide warranties that will protect Fidelity National Financial from claims coming from any foreclosure errors by the bank.

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