FDIC chair pushes for bank fund to settle foreclosure disputes

A top banking regulator believes banks may need to kick billions of dollars into a fund that would pay homeowners to settle ownership disputes that emerge during foreclosure proceedings over documentation issues.

Sheila Bair, the chair of the Federal Deposit Insurance Corporation (FDIC), told CBS’ “60 Minutes” that such a fund might be necessary, as widespread documentation problems continue to emerge as banks struggle to handle a wave of foreclosures stemming from the subprime mortgage crisis.

{mosads}As banks will foreclose on up to a million mortgages this year, continued widespread problems with mismanaged paperwork could lead to a slew of lawsuits, Bair said.

“I think that this litigation could easily get out of control,” said Bair in an interview that will air Sunday. “We’re already feeling like we’re falling behind it.”

To stave off a flood of lawsuits, Bair suggested that banks should contribute to a fund, which would then be used to pay homeowners if paperwork irregularities leads to a dispute over ownership.

“I would assume it would be billions [that the fund would need],” Bair said.

Her comments come as federal and state regulators are working to hammer out a broad settlement agreement with mortgage servicers over the nationwide problem. The large number of foreclosures spurred by the housing crisis has led to widespread problems with mortgage documents, like the “robo-signing” of thousands of documents that have been called into question during foreclosure proceedings.

In the rush to originate new mortgages during the housing boom, banks did not take the proper care to ensure all documentation was properly handled, Bair said.

“It was a matter of cutting corners, not spending enough money and not having quality control,” she said.