September 25 2010 (Chris Moore)

JP Morgan Chase has halted foreclosures until a review of its document-filing process is completed, according to the Wall Street Journal. The New York City-based bank said the freeze affects roughly 56,000 home loans in various stages of the foreclosure process in 23 states.

Chase spokesman Tom Kelly announced that there were cases where employees may have signed affidavits about loan documents on the basis of file reviews done by other personnel.

As a result, the bank and mortgage lender must now re-examine documents tied to loans already in foreclosure to verify if they “meet the standard of personal knowledge or review” where required.

Back in May, law firm Ice Legal LP dropped Chase document-signer Beth Ann Cottrell after it became known that she signed off on roughly 18,000 foreclosure affidavits and other documents each month without actually reviewing the files.

The paperwork problems at J.P. Morgan mirror those uncovered last week at another large mortgage lender, Ally Financial. But J.P. Morgan’s decision is expected to have a much greater effect on the industry because it is held in high regard by its peers. By contrast, Ally, formerly known as GMAC, is still under the cloud of a $17 billion federal bailout package that it has been unable to pay back.

Both firms are investigating whether foreclosure files were improperly assembled, and whether their employees failed to review the documents even as they signed off on them. A growing number of homeowners – even those who missed their mortgage payments – are now scrambling to challenge the proceedings, weighing down an already overburdened court system.

Many critics contend that just by the sheer amount of homes that are in foreclosure that it would be impossible for the banks to properly review, process, and sign off the large amount of documentation required to complete a foreclosure.

Ally officials on Wednesday declined to comment on any ongoing or potential investigations, but they have said that they are confident that “the processing errors did not result in any inappropriate foreclosures.”

Company officials have declined to disclose how many loans may be affected and how much remedying the issue might cost, but spokeswoman Gina Proia said the firm “does not anticipate significant adverse effect on Ally related to this matter.”