WASHINGTON - President Barack Obama stepped into a growing political furor over the nation's troubled foreclosure system Thursday by vetoing a little-known bill that critics say would have made it easier to evict homeowners who missed their payments.
The decision to block the measure, which passed Congress without debate, came as members of the president's own party have urged the administration and federal regulators to more actively address the crisis over flawed foreclosures.
Meanwhile, attorneys general from about 40 states vowed to band together to investigate reports of fraudulent documents and of banks seizing property without having clear ownership of the mortgages.
At least 10 states are seeking to freeze some or all foreclosures within their borders. And calls have increased for a nationwide moratorium - a move that could deal a blow to the earnings of big banks and grind to a halt the sale of millions of properties in foreclosure.
In the middle of a heated election season, a growing number of politicians have been eager to weigh in on the matter - and are taking pains to rebuke the financial institutions at the core of the controversy.
Rep. Edolphus Towns, D-N.Y., chairman of the House Committee on Oversight and Government Reform, called Thursday for the national freeze and Senate Majority Leader Harry Reid demanded that big lenders stop foreclosures in his home state of Nevada.
This week, House Speaker Nancy Pelosi and other key Democrats called for federal investigations of allegations that mortgage lenders improperly evicted people from their homes.
But Democrats were trying to figure out Thursday how they allowed a bill to pass that critics say would introduce more fraud into the system, a Pelosi staff member said. It was sponsored by Rep. Robert B. Aderholt, R-Ala., the first measure he sponsored that passed.
Even he was surprised that it sailed through, his spokesperson said.
"There is absolutely no connection whatsoever between 1/8the bill 3/8 and the recent foreclosure documentation problems," Aderholt said in a statement.
The vetoed legislation, which is two pages long, would have required local courts to accept notarizations, including those made electronically, from across state lines. Its sponsors said it was intended to promote interstate commerce. Lawmakers saw no problems when the House approved it in April by a voice vote, which leaves no record of votes. The Senate passed the bill unanimously last week.
But as the lack of a proper paper trail in mortgage documents came to light, the idea of relying on electronic notaries triggered protests from real estate lawyers and consumer advocates. Relying more on electronic notaries, they warned, could allow more fraud into the system.
That the White House had to pay so much attention to the two-page bill few had heard of before this week shows just how politically charged the issue of flawed foreclosures has become.
White House press secretary Robert Gibbs said the president does not think the measure was trying to undermine protections for homeowners facing foreclosure.
Said Dan Pfeiffer, White House communications director: "The authors of this bill no doubt had the best of intentions in mind when trying to remove impediments to interstate commerce. We will work with them and other leaders in Congress to explore the best ways to achieve this goal going forward."
Senate Judiciary Chairman Patrick J. Leahy, D-Vt., said in a statement that his office heard no objections from inside or outside the Senate and even asked the Justice Department to review the language. His committee then approved the bill and it passed by unanimous consent after every Senate office was notified.
Some lawmakers worried that the foreclosure paperwork issues could become a major threat to the financial system.
On Thursday, Rep. Alan Grayson, D-Fla., sent a letter to a newly formed council of top regulators asking it to form an emergency task force to determine whether the foreclosure problem poses a systemic risk to the U.S. economy.
"So far, banks are claiming that the many forged documents uncovered by courts and attorneys represent a simple 'technical problem' with foreclosure processes," he wrote. "This is not true. What is happening is fraud to cover up fraud."
The Treasury Department did not reply to a request for comment. A spokesman for the Securities and Exchange Commission declined to comment. A Justice Department spokeswoman referred to comments made earlier this week by Attorney General Eric Holder, who said federal prosecutors are looking into allegations of wrongdoing.
National civil rights groups, including the NAACP, the National Council of La Raza and the Center for Responsible Lending, joined labor unions Thursday in calling for an immediate national moratorium on foreclosures.
"If we don't take drastic measures now, we can expect millions of additional foreclosures in the coming years, with a disproportionate number of them involving Latino and African American families," Wade Henderson, president of the Leadership Conference on Civil and Human Rights, said in a statement.
Sen. Sheldon Whitehouse, D-R.I., also called for a national foreclosure moratorium on Thursday, while Michigan Democratic gubernatorial candidate Virg Bernero said he would withdraw $1 billion in state money from J.P Morgan Chase banks if they refuse to ease up on foreclosures.
On Thursday, Iowa Attorney General Tom Miller asked three large mortgage lenders to freeze foreclosures in the state. His office said Iowa will take the lead in coordinating with about 40 other states investigating allegations of mishandled foreclosures. The coalition has begun to call lenders to ascertain the scope of the problem.
"There appears to be an emerging pattern of careless and perhaps cavalier attitudes by a growing number of lenders when it came to the seriousness of the foreclosure process," Miller said.
Industry groups plan to mount a defense of the banks' records and will hold a lunch for Capitol Hill staff members in the coming weeks.
"Industry is correcting the problems, continuing to work with homeowners and communicating with policy-makers about the issue," said Scott Talbott, senior vice president for government affairs at the Financial Services Roundtable, which represents big financial firms.
The nation's banks, in turn, are beginning to feel pressure from investors.
Chris Katopis, executive director of the Washington-based Association of Mortgage Investors, said securities trustees should "audit and review the resulting losses to hold servicers accountable for negligence in maintaining the assets of trusts."
"We are afraid that people's pensions and retirement savings are being impacted," Katopis said in an interview Thursday. "Investors are deeply concerned about possible documentation inconsistencies related to mortgages. It is vital that trustees promptly address these matters."