The foreclosure plot thickens.

On the heels of a “foreclosure freeze” that three major lenders recently announced while they investigate serious claims of botched paperwork, President Barack Obama today refused to sign a bill that could protect them and all other mortgage servicers from potential liability.

Here’s the bill in a nutshell (via Los Angeles Times):

“Designed as a consumer bill, the foreclosure measure could save banks and other mortgage processors from liability in how a foreclosure is processed. Specifically, the bill would broaden the acceptance of notarizations, even those generated by computers. False notarizations have been an issue for several large mortgage firms. At least three major firms have halted foreclosures in 23 states to review how documents were prepared and filed. The central issue is automatic signing by machine or by humans who scarcely examine the papers.”

The bill, which breezed through the House and the Senate, will now head back to Congress for further review.

No rubber stamps this time.

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FREEZE! Don’t move a muscle.

That’s exactly what J.P. Morgan Chase, which is among the largest banks in the United States, intends to do as it sorts through stacks of potentially-flawed foreclosure paperwork, according to the Washington Post.

About 56,000 borrowers in 23 states will be granted temporary reprieve from possible eviction while the bank investigates claims about “forged documents and signatures and other similar problems are being used to try to overturn court-ordered evictions.”

Apparently, serious questions have been raised about whether or not the foreclosure files were properly assembled and if the employees who signed off on/executed the documents even reviewed them.

In fact, a J.P. Morgan Chase employee recently admitted that “she and her team signed off on about 18,000 foreclosures a month without checking whether they were justified.”

Sounds like a big mess.

At least J.P. Morgan Chase is doing the right thing now to fix whatever mistakes or oversights it may have made in the past. Expect other lenders/banks to follow suit as the lens on this issues begins to sharpen.

It apparently already has, according to the National Bureau of Economic Research, in June 2009:

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