Federal Reserve board member: U.S. investigation into mortgage servicing has found 'widespread weakness'
The preliminary results of a multi-agency federal review of the mortgage industry has found "widespread weaknesses" that impair the function of the housing market and hurt consumers, according to Federal Reserve board of governors member Sarah Bloom Raskin.
"We have reached the point where this sign of failure is hindering our economy's ability to rebound," Bloom Raskin said in remarks prepared for delivery to mortgage finance executives at a conference in Utah Friday evening.
Bloom Raskin said that she has seen "little to no evidence of improvement" until now despite the government scrutiny and that things remain similar to when the crisis began in 2007.
Bloom Raskin offered what she called her "initial thoughts on how to rebuild an important but currently dysfunctional sector of the housing market."
One of the major problems, she said, is that mortgage servicing operates on a "flawed business model that creates misaligned incentives."
For instance, she said servicers are paid on an annual fee basis by loan originators but that means that they are being paid too much when the loans are current but perhaps not enough when the loans are delinquent because there are additional costs associated with managing troubled loans.
"The current model also rests on the expectation that, in good times, servicers are using some of the residual income to build out systems and procedures to handle the pressures that come with worse times," she added. "Unfortunately, as we have seen, this has not happened."
Bloom Raskin also suggested that the pooling and servicing agreements that govern securitized mortgages should be more detailed about what a servicer can or cannot do: "They should explicitly allow for loan modifications and other non-foreclosure workout actions when they are determined to lead to a smaller loss to the investor than would a foreclosure."
Bloom Raskin called on "relevant private sector actors need to think beyond their bottom line and focus on how their firms' actions are or are not contributing to the economic recovery."
While Bloom Raskin said in her speech that she did not want to dwell on how the industry came to such a crisis and instead focus on solutions, she did take some time to issue a harsh reprimand to mortgage brokers, loan originators, loan securitizers, sub-prime lenders, Wall Street investors and ratings agencies whose "selfish free-for-all," she said, "ultimately led to an economic slide the effects of which are still visible in the boarded-up houses and sheriffs' foreclosure notices posted all over America."
Ariana Eunjung Cha
| February 11, 2011; 9:00 PM ET
Categories: Federal Reserve, Housing
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