Wells Fargo (NYSE: WFC) will modify 55,000 mortgages, a tacit admission that it had done something wrong with the home loans in the first place.

The big bank announced that:

Out of an abundance of caution and to provide an additional level of assurance regarding its processes, the company is electing to submit supplemental affidavits for approximately 55,000 foreclosures which are pending before courts in 23 judicial foreclosure states. The process of submitting supplemental affidavits will begin immediately with a goal of having this process completed by mid-November 2010

The firm added that

As part of the company’s review of its foreclosure affidavit procedures, the company has identified instances where a final step in its processes relating to the execution of the foreclosure affidavits (including a final review of the affidavit, as well as some aspects of the notarization process) did not strictly adhere to the required procedures

In other words, someone blundered and Wells Fargo expects it is better to acknowledge that and begin to fix the trouble rather than face legal battles in state and federal courts based on charges of a systematic cover-up.

Wells Fargo is quick to point out that it has completed 556,868 mortgage loan modifications, which includes $3.5 billion of principal forgiveness, and has refinanced about 1.9 million mortgage loans over the last two years. That does not excuse it from its behavior on the processing of foreclosed mortgages done with inadequate paperwork and justification.

Other large banks will likely follow suit. They cannot afford to be viewed as holdouts as the industry tries to repair a problem which will hurt it with both mortgage bond investors and homeowners. Analysts believe that the claims from the two groups could range into the billions of dollars. That would be particularly hard on financial firms which made it through the credit crisis and struggle now with Washington reforms which could hurt their earnings.

Well Fargo may be viewed as a leader as it admits that its employees made human errors, even if those errors were based on egregious violations of simple rules. Its competitors may believe that Wells Fargo caved in too soon as it faces charges of malfeasance and fraud. But, all the large mortgage companies will need to acknowledge their errors and not say they were victims of a complex system. Better now than later when the public and attorneys believe that they had something to hide and actually hid it.

Douglas A. McIntyre

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