WASHINGTON -- A set of confidential federal audits accuse the nation’s five largest mortgage companies of defrauding taxpayers in their handling of foreclosures on homes purchased with government-backed loans, four officials briefed on the findings told The Huffington Post.

The five separate investigations were conducted by the Department of Housing and Urban Development’s inspector general and examined Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial, the sources said.

The audits accuse the five major lenders of violating the False Claims Act, a Civil War-era law crafted as a weapon against firms that swindle the government. The audits were completed between February and March, the sources said. The internal watchdog office at HUD referred its findings to the Department of Justice, which must now decide whether to file charges.

The federal audits mark the latest fallout from the national foreclosure crisis that followed the end of a long-running housing bubble. Amid reports last year that many large lenders improperly accelerated foreclosure proceedings by failing to amass required paperwork, the federal agencies launched their own probes.

The resulting reports read like veritable indictments of major lenders, the sources said. State officials are now wielding the documents as leverage in their ongoing talks with mortgage companies aimed at forcing the firms to agree to pay fines to resolve allegations of routine violations in their handling of foreclosures.

The audits conclude that the banks effectively cheated taxpayers by presenting the Federal Housing Administration with false claims: They filed for federal reimbursement on foreclosed homes that sold for less than the outstanding loan balance using defective and faulty documents.

Two of the firms, including Bank of America, refused to cooperate with the investigations, according to the sources. The audit on Bank of America finds that the company -- the nation’s largest handler of home loans -- failed to correct faulty foreclosure practices even after imposing a moratorium that lifted last October. Back then, the bank said it was resuming foreclosures, having satisfied itself that prior problems had been solved.

According to the sources, the Wells Fargo investigation concludes that senior managers at the firm, the fourth-largest American bank by assets, broke civil laws. HUD’s inspector general interviewed a pair of South Carolina public notaries who improperly signed off on foreclosure filings for Wells, the sources said.

The investigations dovetail with separate probes by state and federal agencies, who also have examined foreclosure filings and flawed mortgage practices amid widespread reports that major mortgage firms improperly initiated foreclosure proceedings on an unknown number of American homeowners.

The FHA, whose defaulted loans the inspector general probed, last May began scrutinizing whether mortgage firms properly treated troubled borrowers who fell behind on payments or whose homes were seized on loans insured by the agency.

A unit of the Justice Department is examining faulty court filings in bankruptcy proceedings. Several states, including Illinois, are combing through foreclosure filings to gauge the extent of so-called “robo-signing” and other defective practices, including illegal home repossessions.

Representatives of HUD and its inspector general declined to comment.

The internal audits have armed state officials with a powerful new weapon as they seek to extract what they describe as punitive fines from lawbreaking mortgage companies.

A coalition of attorneys general from all 50 states and state bank supervisors have joined HUD, the Treasury Department, the Justice Department and the Federal Trade Commission in talks with the five largest mortgage servicers to settle allegations of illegal foreclosures and other shoddy practices.

Such processes “have potentially infected millions of foreclosures,” Federal Deposit Insurance Corporation Chairman Sheila Bair told a Senate panel on Thursday.

The five giant mortgage servicers, which collectively handle about three of every five home loans, offered during a contentious round of negotiations last Tuesday to pay $5 billion to set up a fund to help distressed borrowers and settle the allegations.

That offer -- also floated by the Office of the Comptroller of the Currency in February -- was deemed much too low by state and federal officials. Associate U.S. Attorney General Tom Perrelli, who has been leading the talks, last week threatened to show the banks the confidential audits so the firms knew the government side was not “playing around,” one official involved in the negotiations said. He ultimately did not follow through, persuaded that the reports ought to remain confidential, sources said. Through a spokeswoman, Perrelli declined to comment.

Most of the targeted banks have not seen the audits, a federal official said, though they are generally aware of the findings.

Some agencies involved in the talks are calling for the five banks to shell out as much as $30 billion, with even more costs to be incurred for improving their internal operations and modifying troubled borrowers’ home loans.

But even that number would fall short of legitimate compensation for the bank's harmful practices, reckons the nascent federal Bureau of Consumer Financial Protection. By taking shortcuts in processing troubled borrowers' home loans, the nation's five largest mortgage firms have directly saved themselves more than $20 billion since the housing crisis began in 2007, according to a confidential presentation prepared for state attorneys general by the agency and obtained by The Huffington Post in March. Those pushing for a larger package of fines argue that the foreclosure crisis has spawned broader -- and more costly -- social ills, from the dislocation of American families to the continued plunge in home prices, effectively wiping out household savings.

The Justice Department is now contemplating whether to use the HUD audits as a basis for civil and criminal enforcement actions, the sources said. The False Claims Act allows the government to recover damages worth three times the actual harm plus additional penalties.

Justice officials will soon meet with the largest servicers and walk them through the allegations and potential liability each of them face, the sources said.

Earlier this month, Justice cited findings from HUD investigations in a lawsuit it filed against Deutsche Bank AG, one of the world's 10 biggest banks by assets, for at least $1 billion for defrauding taxpayers by "repeatedly" lying to FHA in securing taxpayer-backed insurance for thousands of shoddy mortgages.

In March, HUD's inspector general found that more than 49 percent of loans underwritten by FHA-approved lenders in a sample did not conform to the agency's requirements.

Last October, HUD Secretary Shaun Donovan said his investigators found that numerous mortgage firms broke the agency’s rules when dealing with delinquent borrowers. He declined to be specific.

The agency’s review later expanded to flawed foreclosure practices. FHA, a unit of HUD, could still take administrative action against those firms for breaking FHA rules based on its own probe.

The confidential findings appear to bolster state and federal officials in their talks with the targeted banks. The knowledge that they may face False Claims Act suits, in addition to state actions based on a multitude of claims like fraud on local courts and consumer violations, will likely compel the banks to offer the government more money to resolve everything.

But even that may not be enough.

Attorneys general in numerous states, armed with what they portray as incontrovertible evidence of mass robo-signings from preliminary investigations, are probing mortgage practices more closely.

The state of Illinois has begun examining potentially-fraudulent court filings, looking at the role played by a unit of Lender Processing Services. Nevada and Arizona already launched lawsuits against Bank of America. California is keen on launching its own suits, people familiar with the matter say. Delaware sent Mortgage Electronic Registration Systems Inc., which runs an electronic registry of mortgages, a subpoena demanding answers to 75 questions. And New York’s top law enforcer, Eric Schneiderman, wants to conduct a complete investigation into all facets of mortgage banking, from fraudulent lending to defective securitization practices to faulty foreclosure documents and illegal home seizures.

A review of about 2,800 loans that experienced foreclosure last year serviced by the nation's 14 largest mortgage firms found that at least two of them illegally foreclosed on the homes of "almost 50" active-duty military service members, a violation of federal law, according to a report this month from the Government Accountability Office.

Those violations are likely only a small fraction of the number committed by home loan companies, experts say, citing the small sample examined by regulators.

In an April report on flawed mortgage servicing practices, federal bank supervisors said they “could not provide a reliable estimate of the number of foreclosures that should not have proceeded."

The review of just 2,800 home loans in foreclosure compares with nearly 2.9 million homes that received a foreclosure filing last year, according to RealtyTrac, a California-based data provider.

“The extent of the loss cannot be determined until there is a comprehensive review of the loan files and documentation of the process dealing with problem loans,” Bair said last week, warning of damages that could take “years to materialize.”

Home prices have fallen over the past year, reversing gains made early in the economic recovery, according to data providers Zillow.com and CoreLogic. Sales of new homes remain depressed, according to the Commerce Department. More than a quarter of homeowners with a mortgage owe more on that debt than their home is worth, according to Zillow.com. And more than 2 million homes are in foreclosure, according to Lender Processing Services.

Rather than punishing banks for misdeeds, the administration is now focused on helping troubled borrowers in the hope that it will stanch the flood of foreclosures and increase consumer confidence, officials involved in the negotiations said.

Levying penalties can't accomplish that goal, an official involved in the foreclosure probe talks argued last week.

For their part, however, state officials want to levy fines, according to a confidential term sheet reviewed last week by HuffPost. Each state would then use the money as it desires, be it for facilitating short sales, reducing mortgage principal, or using the funds to help defaulted borrowers move from their homes into rentals.

In a report last week, analysts at Moody’s Investors Service predicted that while the losses incurred by the banks will be “sizable,” the credit rating agency does “not expect them to meaningfully impact capital.”

*************************