FDIC Chair Sheila Bair Warns Senate Committee about “Millions of Infected Foreclosures”

Of all of the Washington D.C. “players” that I’ve come to know over the last few years, there is no one that I have vacillated about more than FDIC Chair Sheila Bair.  There have been times when I found myself smitten by her common sense and consumer oriented bent, and others when I wanted to accuse her of being buried halfway up Geithner’s butt as a result of him stopping abruptly while walking the halls of the Treasury building.

Well, perhaps it’s because Sheila is now a short-timer and will be retiring from her post at the FDIC this July, that she is now feeling a little more comfortable telling the truth, even if that means disagreeing with Walsh at the OCC or even Bernanke at the Fed.

According to Alan Zibel writing for the Wall Street Journal on May 12^th, Sheila 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.”

In her written remarks submitted during a hearing of the Senate Banking Committee on Thursday of this week, Sheila admitted quite candidly that: “We do not yet really know the full extent of the problem.”

“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.”

John Walsh, Acting Comptroller of the Currency says that the problems are limited in scope, so who should we believe?  Sheila, of course… Walsh is a dork. Bank regulators’ had said that reviews of a sample of 2,800 foreclosure cases uncovered only a small number of “improper foreclosures,” however that’s defined by the OCC these days.

Why not consider a career as a Robo-Signer?

This mortgage mêlée started last fall after GMAC became the country’s first “robo-signer,” admitting that they were employing signers who didn’t review documents prepared by the bank’s other departments.  Federal officials launched an investigation and GMAC and soon thereafter, many others all voluntarily placed moratoria on all foreclosures, at least those in non-judicial states… which never a lick of sense, but the country seemed to buy it, so why not?

Some of the improper foreclosures identified sprung from a law preventing them from occurring when the borrower is active duty military, bankruptcy filings should have stopped others, and then there were those that should not have occurred because the borrowers were on the verge of getting modified.

Sheila argued that other regulators very likely missed cases where homeowners should have been granted loan modifications, but were denied improperly.  How many?  I hear you cry. She says the number is “not insignificant.”

She told lawmakers that: “There needs to be much more aggressive action,”

The “consent orders” that came out of the investigation conducted by the federal regulators, including the OCC, OTS and the Federal Reserve, require the banks to engage the services of an independent consultant to review foreclosures from the past two years.  The consultants hired would be charged with identifying borrowers who were damaged by the inadequate and even dangerous, according to the report issued by the federal regulators, foreclosure processes employed by the banks.

I wrote about this outcome from the feds investigating the day their report was made public a couple of weeks ago, and expressed my extreme skepticism over the outcome being that the banks would conduct their own investigations because… I don’t know… because it’s ridiculous, that’s why.

Sheila Bair’s statement, God bless her, points out the same issue.  She openly questioned whether the “independent consultants” would be truly independent, saying that the:

“(the consultants) may have other business with (banks) or future business they would like to do with them.  This is a huge issue.”

(No kidding, Sheila… we all know what a farce it will be… like when Bank of America did its own internal investigation following the voluntary moratorium which followed the discovery of the robo-signing.  Remember that?  Two weeks later and BofA said they checked and everything seems to be just fine and dandy?  So, what’s going to be different this time… has the leopard changed its spots?)

Make your own Bernanke Voodoo doll.

Ben Bernanke, who was also at the senate hearing, was asked about this issue, but chose not to respond specifically, which I find shameful.  Instead he reiterated that federal regulators have plans to fine banks over the inquiry’s conclusions regarding foreclosure processes… and to that I can only say that I have had enough with the whole idea that bankers can commit crimes that damage homeowners and write a check to the Fed to straighten things out.

I mean, between the Fed and the Treasury, we’ve handed the banks trillions.  And now to “make right” their criminal and/or civil violations against homeowners, they’re going to send the Fed and/or the Treasury a couple of sheckles to satisfy some fine, the equivalent of which could probably be found in the cushions of Jamie Dimon’s couch… and that’s supposed to make me think that any of the federal regulators are doing their job and protecting consumers or even punishing the bank’s bad acts… well, it’s just preposterous.  Mr. Bernanke, you’re treating me like I’m six years old again, and I resent it.

In the WSJ’s article, Bernanke was quoted as describing the foreclosure crisis as being a problem of bank regulation, “at some level”, adding that it is “also a macroeconomic problem.”

Memo to Federal Reserve Chairman Ben Bernanke: You are being an insensitive and obtuse jackass, and there’s no excuse for your offensive point of view because I’ve read your paper on the “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” so I know you’re smarter than that.  Yes, water is wet, the sky is blue, and the foreclosure crisis is most definitely a “macroeconomic problem.”  And thank you for stating the obvious.  But, it is also a microeconomic problem, Ben, because it is raping the American homeowner, and is responsible for the wholesale destruction of the lives of millions of middle class American citizens.  Did that thought not occur to you?

And we don’t really have “regulators,” right, Ben?  At least the design of the OCC and OTS, in which banks can essentially choose which one to be regulated by, is dysfunctional, right?  That design has led to the two bank regulators competing for clients by offering comparatively less oversight.  And Ben, if you would say that we do have regulators, then in response I would only posit: Which excesses have been curbed as a result of their regulation?

And in closing…

Sheila Bair also discussed the possibility that Fannie and Freddie, both now government-controlled, may force banks to buy back more defaulted loans, as they have already done, and at this point numerous private investors are filing suits that would demand the same.

According to the Zibel’s story, Sheila’s prepared remarks pointed out in this regard that:

“A significant amount of this exposure has yet to be quantified.”

Actually, I think quite a few people, including many private investors, have hypothesized as to the potential amount of this “exposure,” but it’s obviously not something the bankers would not want quantified on the evening news.  One lawsuit alone, filed on April 21^st in the Commonwealth of Massachusetts by the Federal Home Loan Bank of Boston appears to be seeking recession of some $5.9 billion in mortgage-backed securities, to say nothing of the damages also being sought by the plaintiff.

And that’s just one of the more recent cases filed, but there are others as well.  One, against Bank of America/Countrywide, which if you click that blue type you’ll see I had fun writing about, and another I haven’t covered yet JPMorgan Chase, are both moving forward in the courts, and personally… I cannot wait.  I was hoping to make it to the U.S. Open this year, but now I’m saving my nickels so I can fly in to New York or Boston and sit in the back of the courtroom for one or two of these judicial bank bar-b-ques.  If you can’t make it, don’t worry because I think it’s safe to say that this is going to make for some compelling television… yes indeed.

And homeowners… like I’ve been saying… we’re in a river, not a lake… the water you’re standing in today is not the same water you were standing in yesterday and it sure as heck won’t be the same water tomorrow, so hold on… don’t give up the ship, or in this case the house.  Unless you want to, of course, in which case don’t pay any attention to the banker-people.  Get your own lawyer, choose him or her carefully, and do whatever is best for you.

Mandelman out.

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P.S. Below is Part One of the lawsuit filed by Federal Home Loan Bank of Boston against just about every single entity that was involved in the packaging, sponsoring, rating and offering of $5.9 billion in mortgage-backed securities. Pages 27, 28 &29 outline what the case is all about, and page 28, item ‘f’ is particularly interesting in my opinion as it says that the mortgages were not properly assigned to the trust and that therefore they are not enforceable by the trust in the event it needs to foreclose.

1-Federal Home Loan Bank of Boston v. IMH Assets Corp