FDIC’s Bair sounds alarm on mortgage servicer litigation risk

Outgoing Federal Deposit Insurance Corp. chairman Sheila Bair said it’s unknown how mortgage servicers will be financially impacted by a slew of lawsuits challenging everything from the transfer of mortgages in the securitization process to the handling of loan documents. “These servicing problems continue to present significant operational risks to mortgage servicers,” Bair said. “Servicers have already encountered challenges to their legal standing to foreclose on individual mortgages. More broadly, investors in securitizations have raised concerns about whether loan documentation for transferred mortgages fully conforms to applicable laws and the pooling and servicing agreements governing the securitizations.” Bair made those statements while testifying before the U.S. Senate Committee on Banking, Housing and Urban Affairs Thursday. Bair highlighted several areas of concern in the mortgage servicing sector — namely robo-signing on foreclosure affidavits, weaknesses in the mortgage servicing process and documentation issues. “Given the weaknesses in the processes that have been uncovered during the review, there appears to be the potential for further losses,” Bair said. “Litigation risk is not limited to just securitizations. Flawed mortgage banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize.” The FDIC chair also said she is not satisfied with results from investigations into the mortgage servicing industry, saying “since the focus was so narrow, we do not yet really know the full extent of the problem.” On Thursday, Bair told lawmakers she supports even higher capital requirements for systemic, too-big-to-fail financial firms in the short-term until regulators officially approve the banks’ plans for hedging losses with capital. Bair’s assertions on capital requirements arrived on the same day that Citigroup CEO Vikram Pandit warned that excessive capital barriers could result in banks curbing  lending and cutting back on affordable housing initiatives. Write to: Kerri Panchuk.