FDIC Sponsors Subprime Mortgage Mess

The Wall Street Journal is reporting 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. The Superior situation could be costly 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.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior.

In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior.

The article notes that these problems occurred before Sheila Bair was at the FDIC. Regardless, it is clear the at the FDIC itself was sponsoring loans in violation of federal anti-predatory-lending laws.

So add this to the list of reasons that the FDIC is part of the problem. Instead of investigating blogs, the FDIC should be investigating itself. For more on the moral hazards at the FDIC, please see FDIC Chairman Sheila Bair Is Out Of Control.

On Friday two more banks failed.
Bank Closing Information

First National Bank of Nevada, Reno, NV

First Heritage Bank, N.A., Newport Beach, CA

In defense of Sheila Bair, some hard evidence is pouring in as to how bloggers are contributing to bank closings. The complete report can be found in Why the FDIC Fears Bloggers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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