Fraudclosure Gate Update: Sheila Bair

Is more stuff is about it hit the fan again? FDIC chairman Sheila Bair weighs in on Fraudclosure gate. (Via Reuters)

(Reuters) – The foreclosure mess won’t be cleaned up quickly and could hurt the housing market, which is already a weak link in the economic recovery, regulators said on Monday.

Sheila Bair, head of the Federal Deposit Insurance Corp that guarantees deposits at many of the banks accused of failing to properly vet foreclosure documents, said lawsuits stemming from the problem could clog up the real estate market.

“I fear that the litigation generated by this issue could ultimately be very damaging to our housing markets by prolonging those foreclosures that are necessary and justified,” Bair told a housing conference in Arlington, Virginia.

Attorneys general in all 50 U.S. states are investigating whether lenders rushed through foreclosures and evicted borrowers from their homes without properly checking documents. Lawsuits have already begun to trickle in and banks may also face fines or be forced to repurchase faulty loans, which would hurt profits.

Some lenders temporarily halted evictions while they tried to determine whether they had improperly foreclosed, raising concerns that the backlog of distressed properties could swell and slow an already lengthy healing process.

Federal Reserve Chairman Ben Bernanke said bank regulators would issue a preliminary report next month on foreclosure practices at large financial institutions.

“We have been concerned about reported irregularities in foreclosure practices at a number of large financial institutions,” Bernanke said in opening remarks to a conference sponsored by the Fed and FDIC.

The foreclosure problems have not yet filtered through into economic data on home sales. An industry group on Monday reported that existing home sales rose 10 percent in September, a surprisingly strong bounce back from a summer slump.

“The question remains of the impact of the foreclosure debacle that reared its ugly head in the latter part of September,” said Chris Christopher, a U.S. economist with IHS Global Insight in Lexington, Massachusetts. “The impact will be felt in the October numbers.”

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