1. Why do you think the government turned a \u2018blind eye\u2019 toward unqualified borrowers receiving loans?<\/p>\n
2. How do you explain such widespread deceit in both private institutions and the government involving lending practices?<\/p>\n
3. Is there an ethical crisis that remains in the accounting and finance industries, based on an almost constant flow of fraud, deceit, and corruption in their operations?<\/p>\n
FDIC Faces Mortgage Mess
After Running Failed Bank<\/p>\n
By MARK MAREMONT
WSJ-July 21, 2008
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\u2019t 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\u2019s 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\u2019 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.<\/p>\n
Hundreds of borrowers who took out Superior subprime loans on the FDIC\u2019s watch \u2014 some with initial interest rates higher than 12% \u2014 have lost their homes to foreclosure, data on the loans indicate.
Banking regulators are grappling with a new round of woes related to subprime mortgages, which were generally made to people with poor credit histories. This month, the FDIC took control of the IndyMac Bank, a major lender that specialized in higher risk loans, after it failed. The FDIC intends to keep IndyMac open, as it did with Superior, but it doesn\u2019t plan to originate any new mortgages.
At the time the FDIC was running Superior, subprime lending hadn\u2019t yet emerged as the national disaster it since has become. But some lending experts already were faulting industry practices and warning about rising delinquencies. The FDIC\u2019s problems with Superior could fuel criticism that bank regulators were slow to heed warning signs
The FDIC, one of the chief U.S. bank regulators, manages a giant insurance fund that compensates customers of failed banks, and it takes charge of banks seized by the government. It has taken over hundreds of failed banks over the years, and generally has a good track record handling the difficult job.
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.
An internal FDIC legal assessment, obtained by Beal Bank and filed in court last month, acknowledged \u201cnumerous appraisal deficiencies\u201d in the portfolio and a \u201csmall number of loans that appear to be fraudulent from inception.\u201d Calling the FDIC\u2019s legal position poor, the undated 26-page assessment suggested that the agency\u2019s liability could be as much as $70 million. Another FDIC official, in a deposition, estimated that the cost of settling the case could be less than one-third that amount.
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 statement, FDIC spokesman Andrew Gray said the agency was \u201cprepared to immediately work with Beal\u201d to fix any additional mortgages originated under its watch that violated consumer-protection laws or the FDIC\u2019s 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.
Mr. Gray added that the FDIC \u201cremains deeply concerned about consumer-protection issues. Though these loans with relaxed lending standards were commonplace during this period, time and experience has shown that the long-term interests of borrowers were not always served well by them.\u201d
Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. \u2014 which the bank in turn sold to investors \u2014 also has been troubled. As of April, investors had suffered \u201crealized losses\u201d \u2014 which generally occur after foreclosures \u2014 on 511 of the 3,964 loans in that pool, according to data provided to investors. The vast majority of the loans were originated when the FDIC was running the bank, the data show. In May and June, two ratings agencies downgraded some securities backed by the mortgages, with one citing a large number of severely delinquent loans and other problems. A Bank of America spokesman declined to comment.
Subprime mortgages typically carry high interest rates to reflect the greater likelihood of default. For years, the government encouraged lending to low-income borrowers as a way to increase home-ownership rates. But the market got out of control after some lenders started doling out more aggressive loans, relaxing collateral requirements, and paying less attention to the ability of borrowers to pay.
FDIC Chairman Sheila Bair has been unusually forthright in putting part of the blame for the mortgage mess on regulators, who she has said should have acted earlier. But Ms. Bair \u2014 who took office in 2006, long after the FDIC ran Superior \u2014 also has faulted lenders, criticizing them for \u201clax lending standards,\u201d making \u201cpoorly underwritten\u201d loans, and placing borrowers in \u201cproducts that create financial hardship rather than building wealth.\u201d
Appraisal Issues
Brister Hightower, a retired high-school teacher, lost his rural home near Athens, Ga., to foreclosure after he fell behind on a high-interest mortgage taken out from Superior when the FDIC was running it.
Twenty years ago, Mr. Hightower had purchased what he calls a \u201csmall, run-down house\u201d with a tin roof adjacent to a trailer park. He worked with a cousin to fix up the interior, and added insulation, vinyl siding and a second bathroom. In December 2001, he refinanced it with a $120,700 mortgage from Superior, using the proceeds to pay off an earlier loan and some other debt. The 20-year mortgage carried a 10.75% fixed interest rate, compared with the roughly 7% rate then available to borrowers with good credit.
Some subprime problems have been blamed on lenders giving out mortgages for more than a house is worth, immediately putting the borrower in a financial hole. The appraisal used by Superior valued Mr. Hightower\u2019s home at $142,000. The three \u201ccomparable\u201d properties used to justify that appraisal were well-tended houses situated miles away in neighboring counties. Two were close to the center of Athens, where county officials say property values in general were much higher than in Mr. Hightower\u2019s area. County records show the fair-market value for tax purposes of Mr. Hightower\u2019s home was less than $84,000.
His loan was among those sold to Beal Bank by the FDIC. Mr. Hightower, now 68 years old, says he tried to keep up payments, but couldn\u2019t after \u201cit got to the point I could hardly eat.\u201d Beal foreclosed, and in 2005 sold the property at auction for $76,000.
Told that the FDIC was running the bank when it gave him the loan, Mr. Hightower says: \u201cI wouldn\u2019t expect the government to rip me off\u2026Can I get some money back?\u201d The FDIC didn\u2019t respond to questions about Mr. Hightower\u2019s loan.<\/p>\n
Superior Bank, based outside of Chicago, was 50% owned by the Pritzker family of Chicago, which also controls the Hyatt hotel chain. The bank had just 18 branches, but grew rapidly in the 1990s by making subprime loans nationwide through a subsidiary, Alliance Funding. When Superior failed in July 2001, regulators faulted it for \u201cpoor lending practices\u201d and overly rosy valuations of assets related to its securitization of subprime loans.<\/p>\n
When the FDIC learns a bank is about to fail, it tries to locate a buyer ahead of time to assume its deposits and loans. With Superior, the agency had little warning. A private-sector rescue plan had fallen apart at the last minute. The agency decided that the best way to maximize the value of the failed bank was to continue operating it under a new name while it searched for buyers.<\/p>\n
FDIC Personnel
The FDIC appointed one of its senior officials to be Superior\u2019s chairman, hired a new chief executive, and installed agency employees to oversee day-to-day operations, agency documents show. But it continued to employ many of the bank\u2019s workers who originated subprime mortgage loans. The FDIC sold Superior\u2019s branches and its deposit-taking business for $52.4 million in late 2001, but no prospective buyers materialized for its subprime-lending unit. The FDIC stopped funding new loans in early 2002, and shuttered the operation by that May 31.
Both before and after the FDIC takeover, Superior relied heavily on a national network of independent mortgage brokers to locate potential borrowers. Some such brokers have been criticized for focusing more on the fees they collect from generating loans than on the ability of borrowers to pay. The FDIC says it was concerned about the dependence on brokers, and brought in \u201cindependent compliance examiners\u201d to look at Superior\u2019s lending standards. The agency says it changed some of the guidelines several months after it took charge.
But in a deposition in May for the Beal Bank litigation, a senior FDIC official suggested that fixing the bank wasn\u2019t the agency\u2019s top priority. \u201cOur job was to go in and sell the assets of the institution, and not try to clean up the operations, per se, to make this a better bank,\u201d said the official, Gail Patelunas.
Mitchell L. Glassman, director of the FDIC\u2019s division of resolutions and receiverships, defended the agency\u2019s oversight of Superior in a 2004 letter to FDIC\u2019s inspector general. He said that mortgage applications submitted through brokers were first checked by 270 in-house underwriters, then rechecked by a staff of 21 quality-control auditors, who \u201ceffectively conducted due diligence\u201d on all incoming loans using a 200-item questionnaire.
Beal Bank, based in Plano, Texas, sued the FDIC in 2002, not long after it finished paying the agency about $339 million for 5,315 Superior mortgages. Roughly half were \u201cNew Superior\u201d loans originated when the FDIC was in control, and half were underwritten by \u201cOld Superior.\u201d
Although the FDIC usually sells such loans on an as-is basis, the agency backed the Superior loans with extensive warranties about their quality, including that there was no fraud or misrepresentation in their origination. The FDIC says it included such guarantees, in part, to give Beal Bank the ability to sell back to the agency any loans that had fallen through cracks in the oversight process.
In its court filings, Beal Bank claims that many of the loans weren\u2019t as represented by the FDIC. It says some were based on negligent or fraudulent appraisals, and others were based on false or inaccurate information about borrower income. It also says that minority borrowers were given loans with higher fees and interest rates than similarly situated white borrowers, in violation of federal law.
\u201cThe 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,\u201d says Andrew Sandler, an attorney at Skadden Arps Slate Meagher & Flom LLP, who represents Beal Bank. \u201cThis lawsuit is about requiring the FDIC to meet its own standards of accountability.\u201d
\u2018Gross Discrepancies\u2019
An internal FDIC legal memo on the case that was turned over to Beal Bank\u2019s lawyers refers to \u201cgross discrepancies\u201d in some loan files, including forged signatures or \u201cwildly different signatures purporting to be that of the same person.\u201d A single mother claimed two children in applying for a loan, but later cited the needs of five children when she failed to make a single payment, according to the memo, which is undated.
In 2004, the FDIC hired an outside expert, Silver Spring, Md., consultant Ronald L. Freudenheim, to assess the loans sold to Beal Bank. A version of the consultant\u2019s report, recently filed in court by Beal, said that 13% of the loans showed no evidence that the borrowers\u2019 incomes were verified, while in 16% of loans the borrowers had too little income for the debt they were taking on. Overall, he said, 56% of the loans violated Superior\u2019s guidelines and \u201cshould not have been issued.\u201d The assessment didn\u2019t differentiate between Old Superior and New Superior mortgages.
The FDIC says that was a draft report. Last month, the agency filed a final version in court, which estimated that about 19% of the loans sold to Beal contained \u201cmaterial\u201d breaches of the warranties \u2014 meaning there were significant problems with close to 1,000 mortgages. This version of the report blames Beal Bank for some of the portfolio\u2019s lost value, saying it serviced the loans in an \u201cinferior\u201d manner.
Stephen Costas, Beal Bank\u2019s general counsel, declined to comment on that. He said the Superior matter is an \u201cisolated disagreement\u201d with the FDIC, and that the bank looks forward to resolving it and continuing its \u201cgood relationship\u201d with the agency.
Mr. Gray, the FDIC spokesman, said the agency has \u201cworked in good faith to repurchase loans subject to our obligations.\u201d He said Beal Bank hadn\u2019t provided until recently enough information on the alleged problem loans for the agency to take action.<\/p>\n<\/p><\/div>\n<\/p><\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"
1. Why do you think the government turned a \u2018blind eye\u2019 toward unqualified borrowers receiving loans? 2. How do you explain such widespread deceit in both private institutions and the government involving lending practices? 3. Is there an ethical crisis Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-155274","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/155274","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=155274"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/155274\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=155274"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=155274"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=155274"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}