The FDIC will make everything OK

Or maybe just exacerbate the problems.

While we know that there is a still run at IndyMac, people assume that having the FDIC run it everything will work out. Bad lending practices will be discontinued. Only the highest standards will be implemented. Everything will be on the up and up.

The only problem is that things do not always work out so well. The Wall Street Journal has an article showing how the FDIC can use some some of the shady practices used by the worst of them. Here is a very interesting article regarding the FDIC Facing a mortgage mess after running a failed bank -

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.

The FDIC then sold a big chunk of the loans to another bank. That loan pool was afflicted by the same problems for which regulators have faulted the industry: lending to unqualified borrowers, inflated appraisals and poor verification of borrowers' incomes, according to a written report from a government-hired expert. The report said that many of the loans never should have been made in the first place.

...
In a recent court filing, the FDIC estimated that about 1,500 of the 5,315 loans it sold to Beal either have defaulted or are nonperforming. The FDIC already has bought back another 247 of the mortgages, most of them for violations of federal anti-predatory-lending laws intended to protect borrowers from unreasonably high fees or deceptive practices. Beal Bank has said in court filings that 73 of the repurchased loans were originated while the FDIC was running Superior.

In a statement, FDIC spokesman Andrew Gray said the agency was "prepared to immediately work with Beal" to fix any additional mortgages originated under its watch that violated consumer-protection laws or the FDIC's own subprime-lending guidelines. As for the loans it has already acknowledged were predatory, Mr. Gray said the FDIC has provided recompense to affected borrowers and instructed its servicing contractor to avoid foreclosing.

...
Meanwhile, a separate portfolio of Superior subprime loans that the FDIC sold to Bank of America Corp. -- which the bank in turn sold to investors -- also has been troubled. As of April, investors had suffered "realized losses" -- which generally occur after foreclosures -- on 511 of the 3,964 loans in that pool, according to data provided to investors. The vast majority of the loans were originated when the FDIC was running the bank, the data show. In May and June, two ratings agencies downgraded some securities backed by the mortgages, with one citing a large number of severely delinquent loans and other problems. A Bank of America spokesman declined to comment.

Almost makes the current situation seem even worse. The ones who are supposed to alleviate the problems and watch the situation were contributing to it. Over 28% of the loans sold to Beal Bank the FDIC generated were not performing. Meanwhile almost 13% of the loans sold to Bank of America have gone into foreclosure. And most of the 13% came from when the FDIC was in charge. Not good, not good at all. And not the way to instill public confidence.