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Bailout Watchdog Probes GMAC Foreclosure Problems

A government watchdog is investigating government-owned GMAC Mortgage after a company employee admitted to approving thousands of foreclosures without reading the paperwork.

Tom Grill | Photographer's Choice RF | Getty Images

The special inspector general for the $700 billion financial bailout is looking into the improper foreclosures, which led GMAC Mortgage to halt foreclosures in 23 states, a spokeswoman for the watchdog said.

Special inspector general Neil Barofsky can investigate GMAC because its parent company received three bailouts from the Treasury Department totaling $16.3 billion - more than all but a handful of companies.

The investigation highlights the Treasury Department's competing priorities for GMAC. As majority-owner of GMAC parent Ally Financial, Treasury wants the company to regain its financial footing so it can repay its bailouts and return to private hands.

That has led Treasury to avoid meddling in GMAC's day-to-day business. Yet Treasury has another responsibility under the bailout law: helping homeowners facing foreclosure.

Its main effort relies on GMAC and other mortgage companies' lowering borrowers' monthly payments. Often, the companies can make more money by foreclosing.

GMAC Mortgage halted some foreclosures last month after an employee admitted to approving 10,000 foreclosures per month. The employee signed court papers swearing that the foreclosure documents were accurate. But he did not read the documents.

GMAC's move last month sparked similar admissions and foreclosure halts by big banks including Bank of America and JPMorgan Chase .

GMAC said Tuesday that it has hired legal and accounting firms to review foreclosures in all 50 states. Consumer advocates and lawyers have complained for years about corner-cutting in the foreclosure process by GMAC and other mortgage companies.

Treasury owns 56 percent of GMAC's common shares, plus $14 billion of other GMAC investments. GMAC parent Ally Financial is the only bank that is majority-owned by the Treasury.

Treasury officials said they have not looked into GMAC's treatment of mortgage borrowers.

"Treasury, as a matter of long-standing policy, is not involved in the day-to-day management of any private company," spokesman Mark Paustenbach said in a statement.

He said Treasury has "made clear that these firms must follow the law," and supports efforts by enforcement agencies and regulators to hold the companies accountable for any illegal actions.

Barofsky's office is one of three independent bodies overseeing the bailout, which was approved by Congress in 2008 at the peak of the global financial crisis. He has criticized the government for failing to drive a hard bargain with banks.

For example, he said Treasury Secretary Timothy Geithner may have wasted billions of taxpayer dollars by failing to negotiate with banks that were owed money by insurance giant American International Group .

Banks such as Goldman Sachs got billions from the AIG bailout, which Geithner ran as president of the Federal Reserve Bank of New York.

Treasury's authority to create new bailout programs expired last week.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.