FDIC Engaged In Subprime Lending After Bank Seizure, Then Unloaded Bad Loans On Another, Says Lawsuit

The Wall Street Journal reports:

• 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't 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's 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. [...] Hundreds of borrowers who took out Superior subprime loans on the FDIC's watch -- some with initial interest rates higher than 12% -- have lost their homes to foreclosure, data on the loans indicate.

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• 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.

In the lawsuit, Beal Bank lays out its position against the FDIC in this court filing.

For more, see FDIC Faces Mortgage Mess After Running Failed Bank (Subprime Lender Made Problem Loans On Regulators' Watch) (if link expires, try here, then click link for story, then click to refresh web page if necessary.).

Postscript:

According to the story:

• An undated internal FDIC assessment that Beal Bank obtained and filed in court in June, the FDIC acknowledged "numerous appraisal deficiencies" in the portfolio it sold to Beal and discussed its legal vulnerability. Points of interest: Pages 8-11 summarize the final report of an outside expert; pages 16-18 discuss appraisal, fraud and other problems; pages 26-27 consider the FDIC's "poor" legal situation. The handwritten notes were in the version filed in court; it's unclear who added them;

• Another internal legal analysis shows the FDIC recognized problems with fraud in some loans sold to Beal.