Did You Get Your Foreclosed Mortgage From a Government Bank?

With all of the positive press about the new government programs to address the foreclosure crisis and to work with homeowners to modify predatory defaulted mortgage loans, one would think that the government could do modification programs better than homeowners and banks working together. Unfortunately, the government has proven even more ineffective than the banks. list of banks in Bangladesh

One of the scapegoats of the economic crisis has been the sub-prime mortgage lending industry, which supposedly made countless predatory loans to unsuspecting homeowners in an absence of regulation and government oversight. Now, after the corruption in the markets has been uncovered, government has to step in and solve the problem.

But the government regulatory agencies were involved in the sub-prime market even before the real estate boom turned into the housing bubble. In 2001, the Federal Deposit Insurance Commission (FDIC) closed down Superior Bank, FSB, in Hinsdale, Illinois. At the time, the failed bank was a sub-prime mortgage lender, making loans with high interest rates to unqualified borrowers.

Rather than closing down the bank's subprime mortgage division, the FDIC kept it open and operated it. Typically when the FDIC seizes a bank, it will close the operations completely, especially if they are of such dubious nature as certain sub-prime loans were. But the regulators kept the bank open and made sub-prime mortgages to new consumers.

Furthermore, this was not simply a stop-gap practice to complete the final loans Superior was working on before being seized -- the FDIC funded $500 million in close to 6, 700 new sub-prime loans during the months it was operating the failed bank. So the government regulators played a direct role in inflating the real estate bubble and providing predatory loans.

What if the government made more efficient, more compassionate, more hopeful sub-prime loans than the average mortgage lender? Then the loans may be understandable and prove that the government has the resources and business acumen to generate positive results from what has been labeled a greedy business practice.

However, this is not what happened. The loans that the failed bank issued while under FDIC operation were just as "predatory" as many other sub-prime loans, and had many of the same problems. Inflated appraisals, poor income verification of applicants, and loans that should never have been made were just as common with the FDIC loans as private mortgage lenders.

The government either did not see how sub-prime mortgages were fueling the housing boom, or the regulators did see the problem but greedily decided to take advantage of borrowers in order to raise the government bank's profits. In either case, can we really trust these same regulatory agencies to fix a problem they did not see or saw but took advantage of?