NEW YORK (TheStreet) - As federal regulators continue to examine big banks' flawed foreclosure procedures, Federal Deposit Insurance Corp. Chairman Sheila Bair urged lenders to provide "safe harbor relief" for vacant properties and severely distressed homeowners.
"I would suggest that all interested parties consider some type of 'triage' on foreclosures, perhaps providing safe-harbor relief if the property is vacant or if the servicer offered a meaningful payment reduction - say a minimum of 25 percent - and the borrower could still not perform on the loan," Bair said in a keynote speech Monday afternoon at a symposium on "Mortgages and the Future of Housing Finance."
Bair - who has argued against any kind of blanket moratorium - cautioned that the potential litigation from private investors and state attorneys general could end up "very damaging to our housing markets if it ends up unduly prolonging those foreclosures that are necessary and justified."
The FDIC chief also said her team has been in touch with investors that purchased failed-bank assets from the FDIC to verify that their foreclosure processes have been above-board. If any documentation errors are found, loss-share agreements may be null and void until problems are addressed.
Major lenders have come under intense scrutiny in recent weeks as the so-called "robo-signing" scandal erupted. In court depositions, employees of GMAC and Wells Fargo (Stock Quote: WFC) have admitted to signing off on documents they did not personally review. Those disclosures led to a lawsuit by Ohio Attorney General Richard Cordray against GMAC, as well as foreclosure moratoriums by other lenders like Bank of America (Stock Quote: BAC), JPMorgan Chase (Stock Quote: JPM) and PNC Financial Services (Stock Quote: PNC).
Bair echoed comments made earlier in the day by Fed Chairman Ben Bernanke that regulators were working together "closely... to get to the bottom of this problem." While Bair said smaller, state banks have "limited exposure" to the robo-signing issue, Bernanke said federal regulators are taking a hard look at the practices of big mortgage servicers. They will release preliminary results of that review next month.