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Friday, October 8, 2010

FDIC May Seek More Than $1 Billion From Failed-Bank Executives

These suits will probably change the mortgage industry. The real reason these type of easy credit mortgage were created is that the investment banking industry shielded themselves from losses.  They did it by creating another product that insured the mortgages in case the borrower couldn't pay.  So the investment bank got paid in case the mortgage failed and foreclosed.  In addition, rating agencies were giving these mortgage products, packeded by the investment banks, excellent ratings.  So, what does this have to do with Indy Mac?

I'm trying to explain complicated process in a couple sentences.  Yes, Indy Mac was selling these bad loans and their underwriting processes are in question.  However, they couldn't create these mortgages if there wasn't a market to sell them to investors.

This is probably the beginning to a wider investigation in the whole chain of transactions. First, from the point were loans where underwritten by mortgage broker to the final investor that purchase the mortgage.  My guess is that the industry will be back to pre-bubble standards, since it seemed to work for 70 years.

Just like loan servicing lawsuits will change and hopefully improve the standards in that industry. 

One such letter was attached to a Nov. 24 motion filed by the FDIC in the bankruptcy case of Florida’s BankUnited Corp. The Nov. 5 letter, addressed to 15 bank directors and officers, said that BankUnited “blindly made loans to borrowers who, for the most part, were un-creditworthy, creating an unduly high risk of inevitable failure when the housing market began to decline.” The executives “breached their fiduciary duties,” the letter said.
“The process went on 20 years ago and is happening again now,” Thomas Vartanian, a partner at law firm Dechert LLP in Washington, said in an interview. “This is the way it’s going to go over the next few years as they catch up with doing these investigations and doing claims.”
FDIC Chairman Sheila Bair has said 2010 will be the peak year for failures, and the agency’s list of so-called problem lenders suggests banks will keep collapsing at an accelerated rate in coming months. The confidential list had 829 banks with $403 billion in assets at the end of the second quarter.
The suit against Bank United stated they underwrtoe bad loans when the market started to decline.  Most banks or mortgage brokers were making bad loans in 2004.  Again the regulators need to look at the whole process and all time frames.

Read it all

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