UPDATE 2-FDIC chief sounds alarm on foreclosure litigation

* Bair concerned about foreclosure litigation

* Bair says legislative fix probably not needed

* Says regulators missed robo-signing warning signs
(Adds additional comments from Bair)

By Dave Clarke

ARLINGTON, Va., Oct 25 (BestGrowthStock) – Litigation arising from
foreclosure paperwork problems could be “very damaging” to the
housing market, a top U.S. banking regulator said on Monday.

Federal Deposit Insurance Corp Chairman Sheila Bair said
she did not believe legislation would be needed to address
concerns over whether the paperwork was properly done so long
as investigations show the issue was mostly “procedural.”

State and federal officials are investigating allegations
that for years banks have not reviewed foreclosure documents
properly or have submitted false statements to evict delinquent
borrowers. [ID:nN11106777]

“I fear that the litigation generated by this issue could
ultimately be very damaging to our housing markets if it ends
up unduly prolonging those foreclosures that are necessary and
justified,” Bair told a housing conference in Arlington,
Virginia.

“The regrettable truth is that many of the properties
currently in the foreclosure process are either vacant or
occupied by borrowers who simply cannot make even a
significantly reduced payment and have been in arrears for an
extended time.”

Bair argued it is important to move foreclosures quickly
because until they have been cleared out of the system, the
housing market will continue to struggle.

She said the volume of foreclosures requires a “global
solution” that involves all interested parties.

Those parties often include servicers, borrowers, lenders,
second-lien holders and investors in securities backed by
troubled mortgages. Foreclosures and modifications can be held
up when the interested parties do not reach agreement on how to
handle a delinquent mortgage.

Bair said one part of a global solution could be extending
legal protection, providing a “safe harbor,” to foreclosure
proceedings if the property is vacant or if the servicer
offered a meaningful payment reduction, such as 25 percent, and
the borrowers could still not perform on the loan.

MISSED WARNING SIGNS

The state attorneys general are investigating the use of
“robo-signers” — people who sign hundreds of affidavits a day
— by banks and companies that collect monthly mortgage
payments. It is alleged they did not properly review the
documents they were signing.

Bank of America (BAC.N: ), JPMorgan (JPM.N: ) and Ally
Financial’s GMAC Mortgage are among the servicers whose
practices have come under fire.

Bair said regulators and market participants missed clues
about poor mortgage servicing. She said they should have
questioned how mortgage servicers were able to keep up profits
without sacrificing quality, even as servicing fees were
declining significantly.

“In retrospect, there were warning signs that servicing
standards were eroding,” Bair said.

She also said the robo-signing controversy underscores how
expensive and time-consuming the foreclosure process is,
meaning modifications should be actively pursued before
foreclosure proceedings.

“We know from experience that reducing the monthly payment
through modification raises the chance that the borrower will
make good on the loan,” she said.

COVERED BOND SUPPORT

Bair expressed qualified support for legislation intended
to create a more robust covered bonds market.

Potential issuers of these bonds, including banks like Bank
of America (BAC.N: ), argue that a legislative framework could
boost the market and provide a safer method for banks to raise
funds to lend to consumers for mortgages and other loans.

Covered bonds are debt securities backed by cash flows from
loans but they remain on the issuer’s balance sheet and thus
are seen as safer than non-guaranteed mortgage securities.

Bair made clear that her support for such legislation
depends on losses being covered by investors and not,
ultimately, her agency’s deposit insurance fund, which
guarantees deposits and meets costs associated with the FDIC
seizing a failed bank.

“This would result in decreased market discipline from
investors who know that their risks are essentially
back-stopped by the FDIC,” she said.
(Reporting by Dave Clarke; Editing by Leslie Adler and Tim
Dobbyn)

UPDATE 2-FDIC chief sounds alarm on foreclosure litigation