FDIC’s Bair Says Millions of Mortgages May Be “Infected,” Criticizes Consent Orders

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We’ve said repeatedly that findings of the multi-agency Foreclosure Task Force review late last fall, which looked at 2,800 mortgages from 14 servicers, was a worse than stress test type review, with a deliberately narrow focus designed to find very little wrong.

One of its remarkable findings was that that banks were on solid grounds in foreclosing, both in the borrower owing the money (which would inevitably be the finding given the failure to investigate servicer-driven foreclosures) and that banks were able to find the borrowers’ notes, which was taken to be tantamount to them having the legal authority to foreclose. Anyone who has been following this issue here or on specialist legal blogs knows that mere possession of the note is often a not sufficient threshold for successful action if the foreclosure is challenged.

In a gratifying show of candor and independence (or perhaps because she recognizes that the facts on the grounds make the Administration/banking industry party line untenable) Bair took exception to the “nothing to see here” stance of the officialdom and took exception to the findings of the Foreclosure Task Force in Congressional testimony earlier today.

From the Wall Street Journal:

The head of the Federal Deposit Insurance Corp. is warning that flaws may have “infected millions of foreclosures” and questioned whether other regulators’ inquiries into problems at the nation’s mortgage-servicing companies have been thorough enough.

“We do not yet really know the full extent of the problem,” FDIC Chairman Sheila Bair said Thursday in written remarks submitted to a hearing of the Senate Banking Committee. “Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize.”

The Journal contrasts Bair’s commentary with the testimony of acting Comtroller of the Currency

John Walsh last month. Note that we’ve taken a dim view of his stance:

Acting Comptroller of the Currency John Walsh said last month that the problems were limited in scope. They include cases that shouldn’t have gone forward under a law blocking foreclosures on military personnel, ones in which the borrower was in bankruptcy and cases in which borrowers were already on the verge of having their loans modified.

And she’s not happy with the consent orders, which this and other sites criticized as a whitewash:

Under consent orders that 14 banks and thrifts reached with regulators in March, financial institutions are required to hire a consultant to review their foreclosures over the past two years to identify any borrowers who were harmed by foreclosure-processing problems.

Ms. Bair, however, questioned whether those reviews will truly be independent. Such consultants “may have other business with [banks] or future business they would like to do with them,” Ms. Bair said. “This is a huge issue.”

Even though the FDIC has not always been as tough as we’d like, it remains the only Federal banking regulator that is unafraid of doing its job. Will this continue after Bair finishes her term this June, or will the Administration install someone more bank friendly? Given the Obama track record on this front, I’m not optimistic.

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  1. ambrit

    Given her no nonsense term as head of FDIC, it’s sad to see her go. The fact that she feels compelled to “move on” at this moment says a lot about the poisoned atmosphere in the Federal Government today. That people of good will are apprehensive about this Administrations replacement for her says it all. Watch this space, as the sign says.

  2. Richard


    Just imagine how much pressure her comments put on the Administration to wrap up the bank friendly ‘get out of jail’ agreement with the state AGs!

    What do you think the odds of a deal being reached this weekend? After all, the longer it takes to close the deal, the more likely some regulator will actually start looking into servicing and foreclosures.

  3. attempter

    Millions of mortgages are infected at the foreclosure end…

    And then there’s the fact that they were all fraudulently induced in the first place. (The banks knew they were blowing up an unsustainable bubble, and they were also systematically destroying real jobs in the real economy, toward the goal of destroying them all. So for both of those reasons they knew most people wouldn’t be able to afford these mortgages. Not just the subprimes, either.)

  4. chris

    Sheila was unafraid of doing her job?

    Then why were the Tier One capital ratios of each of the banks taken down the weekend of April 29 so grossly negative that they deserved to be taken down at least a year ago?

    Community Central Bank
    -96.57 on 3/31/11, -46.52 on 3/31/10

    The Park Avenue Bank
    -71.24 on 3/31/11, -33.28 on 3/31/10

    First Choice Community Bank
    -172.55 on 3/31/11, -20.34 on 6/31/10

    Cortez Community Bank
    -159.21 on 3/31/11, -27.37 on 3/31/10

    First National Bank of Central Florida
    -102.34 on 3/31/11, -32.91 on 3/31/10

    Too bad the meme of how wonderful the current head of the FDIC is doesn’t match the reality on the ground of not enforcing the Prompt Corrective Act.

    1. attempter

      not enforcing the Prompt Corrective Act

      Just because they refused to use the resolution authority they already had doesn’t mean they won’t use the resolution authority they just got in the not-at-all-a-sham finance reform bill.

      1. dan

        I surprised Yves thinks Bair is “tough” on banks. How did she get that reputation?

        Wasn’t she the head of the CFTC when they essentially said derivatives were of no risk? I’m confused (insert sarcasm)

        1. Adam Levitin

          CFTC=Brooksley Borne, a Democrat appointed by Bill Clinton.
          FDIC=Sheila Bair, a Republican appointed by GWB.

          Not the same person.

        2. Yves Smith Post author

          Bair was trying to break up Citibank and get Pandit fired. She did succeed in getting Citi to shrink by selling a lot of its operations despite active opposition by Geithner et al. That is far more important and politically fraught than the FDIC not resolving some small banks as quickly as it might. And the FDIC prefers to sell banks rather than resolve them. It may be in some of these cases it was trying to broker sales that did not go through.

      1. Lyle

        The WAMU shareholders were screwed in any case as the Bank was Insolvent. If you were a WAMU shareholder and did not know that the FDIC takes is at the head of the line before even unsecured creditors of the holding company, as well definitely the common shareholders then you have a fool for an investment advisor. Note that you have to look at the corp structure a bit. WAMU the bank was a subsidiary of WAMU the holding company and the FDIC took over the bank. The holding company folks were screwed but that is in the nature of a Bank Holding company in the US. Perhaps they got screwed a bit worse than the shareholders of Citi, but the difference between 90% and 100% is not that great.

      2. Jim A

        Blaming the FDIC for scrweing WaMu’s shareholders is like blaming the midwife for for your pregnancy. Management screwed the shareholders by lending out their capital to people who were unlikely to pay it back. The FDIC just told ’em to push.

        1. Dan

          Good point WaMu shareholders were inevitably screwed

          Doesn’t change the fact that JP Morgan got a sweetheart deal that was made even better by possibly getting more money from taxpayers

  5. renholder

    I don’t know where you’re getting your numbers. There are very few banks in the country with negative Tier 1 Capital numbers at any point (maybe two or three at this point). Even the first bank in your list did not have a negative capital ratio at 3/31/10, and barely had below a 2% capital ratio at 3/31/11

  6. Just a thought...

    “Even though the FDIC has not always been as tough as we’d like, it remains the only Federal banking regulator that is unafraid of doing its job.”

    Outright, unadulterated horse crap. The FDIC is as timid as any regulator, Bair just likes talking smack about any topic over which the FDIC has no oversight. It’s good entertainment but that doesn’t mean the FDIC accomplishes its banking oversight mandate any better than the OCC or the Fed. I’d say the OTS and NCUA too, but the OTS is going away, for good reasons, and the credit union industry and their regulatory/trade organization would be the first victims of campaign finance reform.

    Could Bair be lobbying for a consumer protection gig? Foreclosure fraud pit bull would be a good foundation for taking the helm of the CPFPTPCA or whatever the new agency will be called.

    1. Yves Smith Post author

      That is not true. The FDIC put forward tough securitization reform proposals, was tough with Citi per above, and has crossed swords with the other banking regulators often. If you don’t think the FDIC is tougher than the other Federal banking regulators, you have not been paying attention.

  7. readerOfTeaLeaves

    On a related note, a Ratigan segment today makes quite clear the banks have been ‘creating’ documents in order to foreclose — and the subjects interviewed all appear to be quite credible: http://www.msnbc.msn.com/id/3096434/#43013545

    For anyone in the US who hasn’t wondered why their local government budgets: school districts, libraries, state functions, are tanking beneath budgets barely on life support, what Bair is saying is not rocket science. But it’s good to hear it.

    Here’s hoping we hear more of it.

  8. MichaelC

    Thanks for highlighting Bair’s testimony.

    I’ve been clinging to the hope that at least one person with some integrity lived (relatively uncorrupted, and still young enough to move elsewhere to fight the good fight) in the regulatory swamp over the past few years, and that she was one of the least imperfect residents willing to piss off the Geithner/Summers/Rubinistas.

    That hope was severely tested the other day(and previously) by your comprehensive debunking of the FDICs, “we can now be spared all Lehman’s” BS.

    Her testimony seems to indicate to me that she (as the lame duck head of the FDIC) endorsed, but didn’t embrace, the report. That doesn’t bode well for us if it signals that the incoming FDIC regime will be more bank friendly, so its good to see she’s still pissing people off as a warning.

    Perhaps that’s too generous,ridiculously naive, and completley wrong , but the few ballsy women who’ve stood up in this crisis have earned my respect.

    And they won’t shut up. Hoorah!

    If she takes a lobbyist job, then shame on me and ignore my comment.

    1. Yves Smith Post author

      The FDIC did not design the Dodd Frank resolution process. It really can’t take issue with it, the time has passed. And the reasons the Dodd Frank provisions fail is for reasons that would not be familiar to the FDIC (it deals with depositaries. and hence dealer banks and international issues are outside its historical purview). I suspect strongly it relied outside input, perhaps from the Fed or Treasury for that paper.

  9. Susan Truxes

    Remember Sheila Bair’s cameo on 60 Minutes about the mortgage train wreck? She said “Yes, I think they can find them,” when she was asked about all the missing notes and the bluster of the big banks who claimed that the notes were stored in various warehouses in Maryland and Minneapolis, etc. Now it seems she is recanting this vote of confidence. Not only recanting. She is clearly stating the opposite. She must be sick at heart over the state of the banking industry. I really admire her for coming out on this one. Its a dagger to the heart of the fraudsters.

    1. Yves Smith Post author

      She did not look confident in her answers to those questions, her body language was at odds with her message.

  10. pezhead9000

    Talk is cheap

    “she has wilfully and intentionally allowed the taxpayer and the prudent banks of this nation to be repeatedly looted through her willful and intentional refusal to enforce already-existing black-letter law”

    “Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment.”

    1. Yves Smith Post author


      Prompt corrective action applies only to the FDIC guaranteed depositary. Her authority does not extend beyond that. And if putting Cit or BofA in receivership would have exhausted FDIC’s funds (almost certain) then the FDIC would have had to go to Congress for more funds as it did in the S&L crisis. That was approved with great reluctance and only because Congress had to (the banks were dead already).

      If resolving a bank would require going to Congress for additional funds this was not a decision Bair could make. She’d have to get consent from the Administration. So your and Denninger’s charge is off base. You are attributing to her more authority than she has. FDIC premiums are not great enough to give her the firepower to act as a free agent.

      1. pezhead9000

        Thank you for the clarification. I agree that Sheila has publicly voiced concerns and brought some attention to the issues – unlike others in the bank/wall street friendly administration.

        Do you think the FDIC has done an adequate job regulating/examining the banks?

        Do you think the FDIC has exposed the taxpayer to undue liabilities with their loss-sharing agreements?

        1. Yves Smith Post author

          From what I can tell (and I should know more of the technicalities on this, as to why it was not the FDICs’ duty), it was the OCC and the Fed that were responsible for bank compliance under the Home Owners Equity Protection Act. If that had been adhered to, you would have seen a good bit less subprime

          Another problem is that the big losses to the “banks” were as a result of their shadow banking activities (funding with repo, retaining CDOs). It’s been this site’s contention that it was CDOs that turned what would have been a contained subprime problem into a global financial crisis.

          Clearly all the regulators should have done more. But the FDIC really was not the best positioned cop on this beat. And look what Rubin and Greenspan did to Brooksley Born. Bair did get bolder later in her tenure and crossed swords with Geithner regularly, but that may have been an evolutionary process for her, that she got more aggressive as things got worse.

  11. scraping_by

    Interesting. Ran into a article where it was mentioned, in passing, that the Cambodian peasants were being kicked off their land in favor of local money men. It seems the country was shifting to a system of written deeds, and the peasants’ ownership being rooted in traditional, cooperative systems, they couldn’t prove it.

    Now the fraud/foreclosure epidemic is based on land ownership shifting from individual, recorded deeds to corporate fiat. Lames excuses have the standing of law, if the law stands for it. Because homeowners can’t prove the banks didn’t live up to their end of the bargain, they’re kicked off their land.

    One wonders what will replace corporate fiat. Possibly a return to the willingness to commit violence? Or some national social form controlled by and for the best and brightest? Interesting future.

  12. Francois T

    “Will this continue after Bair finishes her term this June, or will the Administration install someone more bank friendly? Given the Obama track record on this front, I’m not optimistic.”

    Neither am I, but it sure makes for a good bet against those who hope against hope.

    Obama ought to be ashamed of his putrid performance regarding banks.

    Oh wait! Shame presume conscience, right?

  13. Francois T

    Why isn’t her testimony and statements appearing on TV? Even the Ed Show doesn’t talk about it.

  14. Skippy

    Yves going to bat for Bair, that is a tell.

    Dear Lass, the convolutions of complexity are upon us all…eh.

    Skippy…Fitting myself for a skirt, is shaving the legs an option, waxing is out of the question K.

  15. Davidh

    Your title is misleading- its not the mortgages that are infected.

    Ms. Bair clearly states that the foreclosures are infected.

  16. Bravo

    Infected mortgages? She seems to be getting ever closer to revealing the real truth that the Obama administration is hell bent on sweeping under the rug via the current AG settlement charade……the fact that there are potentially millions of legally unenforceable mortgages out there if the AG’s and the judicial system could be counted on to do their jobs.

  17. chris

    To renholder,

    The numbers are from the Uniform Bank Performance Report.

    Here’s some additional numbers-

    Number of troubled institutions-

    3/06- 48
    3/07- 53
    3/08- 90
    6/08- 117
    9/08- 171
    12/08- 252
    3/09- 305
    6/09- 416
    9/09- 552
    12/09- 702
    3/10- 775
    6/10- 829
    9/10- 860
    12/10- 884

    The number of troubled institutions for the 1st quarter of 2011 will be available on or around May 24.

    From 2007 through 2010 more than 300 banks failed and more than 800 more were put on the FDIC’s list of troubled institutions.

    Banks are being effectively regulated? By any regulator?

    Now, perhaps these numbers have no meaning but if that is true Sheila is ineptness personified.

    To skippy,

    I’m shocked, shocked! You wouldn’t be suggesting that a defense of Sheila has anything to do with her gender would you?

    1. ambrit

      Dear Chris;
      May I suggest that being put on the list in the first place is a form of regulation by “shaming?” Of course, you can reply that the banking crowd is “without shame.” In that case, one merely needs to point out that those “without shame” are rogue actors and deserving of the severest penalties. “The beatings will continue until the bottom line improves!”

  18. Luxury Class

    “Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment. ” — Keith Epstein and David Heath

    That was 2009.

  19. Infuriated

    Bair isn’t anything like the the million plus who don’t have a fantastic job and are keelhauled the hell out of their houses by layers of accomplices. When the powerful reach the exits they start to ponitificate? Is that how DC sometimes works? Read the ‘Great Gatsby’ it’s all in there.

  20. chris


    I agree that being put on the “troubled” list could be a form of regulation.

    Letting banks set there on a list or even issuing cease and desist orders (another attempt at beatings until moral improves) doesn’t resolve the failed institution.

    The FDIC’s only purpose is to protect depositors not coddle and massage bankers who should have already experienced the death knell of capitalism.

    I know. Perish the thought that failed, ineptly managed, corruptly administered, and poorly regulated financial institutions should be introduced to capitalism.

    Can’t have that can we?

  21. Sungam

    In many way’s it’s unsuprising that the head of the FDIC is the one to speak out about this. They are the ones left holding the can when deposit institutions go belly up.

    They have also kicked off a court case against Deutsche Bank to get money out of them for mis-documenting mortgages (well the subsidiary that Deutsche foolishly bought…). I still find it hideously amusing that the only Bank facing any charges from an official Regulator/body for mis-documentation is a non-US bank.

  22. ambrit

    Dear Chris;
    I hate to trot out this old chestnut but the implicit idea behind the FDIC might have been to restore ‘confidence’ in banks as a class. Remember the bank runs of the old pre-New Deal days? By creating a social safety net for depositers, (shades of socialism for the masses!), the Feds also guaranteed the banks themselves, indirectly, by nipping previously endemic ‘bank runs’ in the bud. In essence, the government provided stability for the banking sector. Cry as they might, most bankers, if you get them off by themselves, would willingly trade off a reasonable percent of their capital in exchange for the kind of peace and quiet that keeps the yields rolling in. I suggest that only the kinds of bankers who should be in Gamblers Anonymous would give a full throated cry of rage at greater reserve requirements, etc.
    As for the ‘true capitalism’ arguement, (if I read you aright); the concept “looks good on paper” but runs into signifigant roadblocks in execution. For instance, the concept of ‘rational choice’ has come under great pressure lately. Irrationality, I suggest, is the essence of being human. Banking, when run right, is, in the best sense, inhuman. Secondly, the ‘extinction arguement’ comes into play. Pyroclastic flows are a sovreign corrective to the mistaken notion that people can safely live on the slopes of active volcanos. However, the lesson is generally lost on those who could have best profited from it. Just ask the poor people of Pompeii and Herculaneum. Since the greatest class of ‘victims’ from the banking debacle are losing most of their posessions, along with their future prospects due to the , I suggest, Draconian penalties imposed for credit default, (remember the “bankruptcy reform act” of a few years ago?) the extinction arguement wears a more than slight Social Darwinian aspect, does it not? Finally, it’s high time, I think you’ll agree, to decouple “crony” and “capitalism.” Then, place the blame, and the bill for the costs, for our present woes where they belong. We can argue about the details later.

  23. Allen C

    Black stated that when he was involved they were closing banks showing profits. Perhaps Bair is short of a complete regulatory capture.

    Great comments BTW.

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