Hat tip to Coffee for this Wall Street Journal story, "FDIC Faces Mortgage Mess After Running Failed Bank":
Federal officials heap much of the blame for the subprime mortgage mess on lenders, claiming they recklessly made too many high-cost home loans to borrowers who couldn’t afford them.
It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court.
The unusual situation, which is still bedeviling bank regulators, stems from the 2001 seizure by federal officials of Superior Bank FSB, then a national subprime lender based in Hinsdale, Ill. Rather than immediately shuttering or selling Superior, as it normally does with failed banks, the Federal Deposit Insurance Corp. continued to run the bank’s subprime-mortgage business for months as it looked for a buyer. With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data.
The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers’ incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.
This is creating problems for the FDIC:
Texas-based Beal Bank SSB, which bought a portfolio of Superior loans, about half of them originated under the FDIC, is suing the agency in U.S. District Court in Washington. The suit claims many of the loans were made improperly and are plagued with problems.
Beal’s attorney said of the lawsuit:
"The FDIC has established high standards of ethical and legal conduct for mortgage lenders that it regulates, but has demonstrably failed to meet these standards in its lending activities at Superior and loan sales to Beal Bank," says Andrew Sandler, an attorney at Skadden Arps Slate Meagher & Flom LLP, who represents Beal Bank. "This lawsuit is about requiring the FDIC to meet its own standards of accountability."
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I think, because this was happening early, that a couple of things were happening.
The government employees were having fun playing bank.
The regular minions of the floor, worried over losing their jobs, worked hard to get whatever parachute they could. If they could, I’m sure tellers would have been stuffing pockets everytime fed managers turned around.
“Where are you going?”
“Oh, just down to the vault…I check to make sure the spare keys work every Tuesday.”
“Well, uh, okay then.”
“Hey, Pot, it’s kettle. Um, yea, you’re black.”
@ billydlight:
I think you’re right on. A little more scrutiny on the part of the FDIC up front could have avoided the whole issue. In any case, it looks like they’re trying to make good:
“In a statement, FDIC spokesman Andrew Gray said the agency was “prepared to immediately work with Beal” to fix any additional mortgages originated under its watch that violated consumer-protection laws or the FDIC’s own subprime-lending guidelines. As for the loans it has already acknowledged were predatory, Mr. Gray said the FDIC has provided recompense to affected borrowers and instructed its servicing contractor to avoid foreclosing.”
With over 25% of the loans sold to Beal in default or non-performing, they’ve got their work cut out.
This is much worse than 25% NPA because almost half of the original loans are paid off and no longer exist. This is actually 60% of the remaining loans that are nonperforming.
Igor says: hopeless
Everyone is playing bank.
http://www.thenation.com/doc/20080804/henry