Even though it is smaller banks that are continuing to fail, smaller banks have consistently maintained stronger loan portfolios than large banks, Federal Deposit Insurance Corporation chairman Sheila Bair told the Securities Industry and Financial Markets Association.

At the smaller banks, loan balances keep coming down quarter after quarter. "We have seen that phenomenon,'' she said.

But the pain and "healing" in the industry is not over, she said. On Friday, state and federal regulators closed four banks, with bank failures this year rising to 143, surpassing 2009 which saw a total of 140 bank failures amid the recession and growing loan defaults. Assets of the four bank failures totaled $906.0 million.

Foreclosures sill need to be resolved, she said.

There have been "serious issues with documentation" and "there may be more issues beyond robo-signing" of large numbers of loan applications without human review, she said.

"We don't have all the information in yet,'' she said.

A "file-level review" is under way and she backs the idea of a "safe harbor,'' where foreclosures are allowed to proceed if the lender has made an honest attempt at a significant reduction in the payment involved. But if, after a cut of 20 percent or 25 percent of the principal and interest involved, a borrower still can't make the payment, then the bank should be allowed to move ahead with foreclosure.

That is needed if the housing market is to recover, she said. Slowing down the foreclosure process stalls the "healing process,'' she said. "The market at some point does have to clear," she said.