The Government National Mortgage Association (Ginnie Mae) recently discovered that Bank of America (NYSE: BAC) is missing key documents relating to mortgages the bank services for it, Kate Berry reported for National Mortgage News.

Because Bank of America is missing so many documents, Ginnie Mae put a planned sale of mortgage servicing rights on hold. While Bank of America assesses the problem, Ginnie Mae has decided to take inventory more broadly, Berry reports: "...Ginnie Mae, is trying to assess the magnitude of the problem of missing documents. Ginnie now plans to send letters this month to about 10 of the largest mortgage servicers – including B of A, JPMorgan Chase and Wells Fargo – that take part in a special program to expedite servicing transfers."

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Wells Fargo (NYSE: WFC) services the largest face value of mortgages for Ginnie Mae, with nearly $420 billion. According to Wells Fargo spokesman Tom Goyda, "Loans serviced for Ginnie Mae are about 23 percent of our total servicing portfolio."

JPMorgan Chase (NYSE: JPM) services the next largest slice of Ginnie Mae mortgages, at nearly $157 billion. Bank of America is third at $118 billion.

Turning Over A Big Rock

What will Ginnie Mae learn and what will it mean for the likes of Wells Fargo, JPMorgan Chase and Bank of America? Only time will tell, but the news could be ugly all around.

Problematic documents -- including missing documents, altered-for-litigation documents and contradictory documents -- have proved to be so widespread that law enforcers entered multi-billion dollar settlements with the banks and their document-providing contractor, Black Knight InfoServ LLC (nee Lender Processing Services) in an attempt to address the issues. Not that the settlements resolved all issues.

Catherine Curan reported for the New York Post that Wells Fargo had a manual instructing its attorneys on the procedures to follow when the foreclosure files they received were missing needed note endorsements or other documents. Such a manual would be unnecessary if files were consistently complete. Curan's follow up article reports that New York regulators are scrutinizing the manual. Wells Fargo has denied the manual reflects any wrongdoing on its part.

Still, the idea that many mortgage documents are missing is not new. In 2010, testimony by Linda DeMartini of Bank of America raised the question of whether most Countrywide-originated loans were missing endorsements.

Or consider what Deutsche Bank said when it filed a claim in the American Home Mortgage bankruptcy proceeding. The filing, which is dated January 11, 2008, states in part (at paragraph 16): "there exist missing or defective loan file documents for several billion dollars in original principal amount of loans."

As to what Ginnie Mae will find when Wells responds to its request, Goyda said, "Wells Fargo collects, retains and tracks documents that Ginnie Mae requires for each loan file and we work with the agency to review our compliance with those requirements."

Potential Liability

The consequences of Ginnie Mae's taking inventory, if large numbers of documents are found to be missing, could be quite large. Under the Ginnie Mae program, reported Berry, servicers "agree that they will bear the losses and legal costs for any problems with missing documents." The losses and costs are most likely to result from foreclosure litigation, because missing or defective documents can greatly slow or even prevent banks from foreclosing.

It's not possible to quantify the potential liability at this time, however, investors in these banks should watch how this situation develops. Not only could liability arising from missing/defective document-based foreclosure problems prove large, the revelation that large amounts of documents are missing could catch law enforcers' attention. Again. Bank of America spokesman Rick Simon said that Bank of America would not comment for this story.