Foreclosure Crisis: Regulator Eyeing Bank 'Loss Share' Deals

NEW YORK (

TheStreet

) --

Federal Deposit Insurance Corp.

Chairman Sheila Bair reiterated on Monday that her agency is examining the foreclosure practices of acquiring banks that have gotten "loss-share" arrangements on deals for failed competitors.

"We will not make loss-share payments," Bair said at the Securities Industry and Financial Markets Association annual conference on Monday. "We will claw back payments that have already been made."

Hundreds of banks have failed since the start of the financial crisis, with hundreds more expected to collapse before the economy rebounds. When the FDIC seizes a bank's assets, it markets and sells them to other institutions.

At the start of the crisis, when fewer buyers were interested, the FDIC was forced to provide generous loss-share arrangements to woo suitors, including those for

IndyMac

and

BankUnited

. Now, those incentives have softened as acquiring banks are chasing yield.

Banks Boost Yield Through FDIC Auctions>>

Meanwhile, major mortgage servicers have come under fire for the practice of "robosigning." Employees have signed off on hundreds of thousands of affidavits without properly vetting information.

Bank of America

(BAC) - Get Report

,

JPMorgan Chase

(JPM) - Get Report

,

Wells Fargo

(WFC) - Get Report

,

Citigroup

(C) - Get Report

and other large firms have all been ensnared in regulatory investigations and the threat of potential lawsuits from investors in mortgage debt.

On the bright side, Bair said, she sees the foreclosure mess as something "that can be turned into an opportunity" to restructure debt for troubled borrowers and cool down the accelerated foreclosure levels of recent months. But, she warned, "At some point, the market has to clear. That is just the tragic reality of it."

Bair also said the government has too many incentives allocated toward housing, in tax policy and the affordability that's now being subsidized by Fannie Mae, Freddie Mac and the

Federal Reserve

.

Bair offered a common refrain on Fannie and Freddie reform, saying lawmakers should "get the government out of it or make explicit guarantees and charge for it." She also said that FDIC officials "spend a lot of time worrying about interest-rate risk" that's heightened due to the Fed's so-called QE-II policy.

Last week the Fed agreed to purchase $600 billion more in U.S. Treasury notes, which has been criticized by some as hyperinflationary and bad for the currency markets because it "artificially" lowers the value of the dollar.

In an earlier discussion,

Bank of New York Mellon

(BK) - Get Report

CEO Robert Kelly also said he's worried about the Fed's recent moves. Kelly is taking a trip to China next week and plans to spend a lot of time discussing what the Fed's move means for currency markets.

"We've done most of the things we can do from a Federal Reserve standpoint," said Kelly. Instead, stimulus "has got to come from government policy now."

Kelly also said that, despite homeowners' difficulties -- and banks' errors in processing foreclosures-- the vast majority of situations represent vacant properties or borrowers who are more than a year late on mortgage payments.

"As terrible as I feel for the homeowners, we've got to get this process over with," he said.

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