Warning signs of foreclosure crisis were ignored, says FDIC Chairman Sheila Bair
Monday, October 25, 2010; 8:20 PM
Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., said Monday that federal officials should have recognized "warning signs" in recent years that the mortgage industry was cutting corners in the foreclosure process.
Bair, one of the country's top banking regulators, said both the federal government and the financial industry should have questioned how it was possible that banks were cutting their costs in foreclosing on homes without running afoul of standards.
"Sadly, those types of questions were not asked," she said at a housing conference in Arlington.
Speaking at the same event, Federal Reserve Chairman Ben S. Bernanke said banking regulators plan next month to issue the first formal federal assessment of the latest foreclosure crisis, which has raised questions about whether lenders have been seizing people's homes legally.
"We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bernanke said. "We take violations of proper procedures seriously."
He said regulators are also looking at how widespread foreclosure problems might be affecting the real estate market and the stability of banks and other financial firms.
The joint effort by federal bank regulators is one of several government reviews of the mortgage industry. The Department of Housing and Urban Development is reviewing how the largest banks performed in modifying loans for struggling borrowers, and civil and criminal investigators are exploring possible legal violations.
Bair, for her part, said that most of the affected banks aren't regulated by the FDIC. The agency tends to oversee community banks, while the major problems have been identified at the nations' largest banks.
Bair also warned that her agency, which arranges for the sales of banks when they fail, could refuse to reimburse investors if those banks do not follow appropriate foreclosure procedures.
"We have made clear that losses associated with improperly executed foreclosures will not be eligible for loss-share arrangements until problems are appropriately remediated," she said.
The comments came amid reports Monday that Bank of America did not complete a thorough review before deciding to reinstate foreclosures last week after a 10-day pause. Bank of America acknowledged that it only reviewed hundreds of affidavits filed in more than 102,000 foreclosure cases that the bank is resuming.
"We never said that our review tested each of these previously filed affidavits in these 102,000 proceedings," said Dan Frahm, a Bank of America spokesman. "We are being very deliberate as we restart the affidavit process with new steps and controls."
Meanwhile, the Obama administration's effort to reduce the number of foreclosures by restructuring the terms of home loans that borrowers can't afford came under sharp criticism Monday.
A report by the federal bank bailout watchdog challenged the administration's assertion that the program had helped more than 1.3 million homeowners.
"Treasury makes the remarkable argument that every single one of these modifications is a success, including the nearly 700,000 that have failed and more than 173,000 that remain in limbo," says the report by the special inspector general for the financial rescue program.
Treasury officials said the program has been successful in keeping a significant number of people in their homes.
Staff writers Ariana Eunjung Cha and Brady Dennis contributed to this report.