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Posted at 9:00 PM ET, 02/11/2011

Federal Reserve board member: U.S. investigation into mortgage servicing has found 'widespread weakness'

By Ariana Eunjung Cha

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."

By Ariana Eunjung Cha  | February 11, 2011; 9:00 PM ET
Categories:  Federal Reserve, Housing  
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Where is the FBI and the Grand Jury.

Congressional reviews mean nothing = sweeping the matter under the rug.

Fraud is against the law!

Bring on the FBI and the Grand Jury!

Posted by: rheckler2002 | February 11, 2011 10:07 PM | Report abuse

wow, a "harsh reprimand." what's next, a fulsome challenge? a spirited dissent? perhaps thundering condemnation - or is she holding off on that until the 14 million estimated foreclosures mpve thru the system (estimates thanks to banker-felons Goldman Sacks (get it - looting...)
many of those f.c. represent families - meaning that some 35-40+ million people will face the f.c. crisis head on, joining in a unique and debilitating disapora unlike any other, ever.
luckily we have Harvard lawyers like this one on the case, issued toothless warnings and reprimands. wow, I am so relieved. for a while there it seemed the federal government my taxes support was going to stand idly by while 15% of the population got drop kicked out of their homes to the curb by rapacious banks that are so emboldened that they defraud and illegally f.c. *deployed military personnel* by the thousand. (but hey they apologized when caught out by heroic journos, and offered to pay (some) of the money back.
if I go rob a fast food place tomorrow, and get caught - is this what happens to me? only after being fingered dead to rights do I 'fess up - and then the 'penalty' is simply giving the money back? really?
I was unaware that we had abolished our system of laws, courts, indictment powers, etc.
as I said, I rest more easily knowing that the Feds are issuing "harsh" warnings as bankers high-five their way into our neighborhoods by the million.
and did you note that she shills (again) Timmy G.'s line - that the loan mod must be proved to benefit the *investor?* I have paid just under $300k to live in my house for 4.5 years. I sort of thought *I* was the investor.

Posted by: FloridaChick | February 11, 2011 11:33 PM | Report abuse

We're currently in the midst of the greatest mortgage refinancing frenzy of the past 5 or 6 years. Rates are now the lowest they've been since mid to late 2003, I worked with a company called "123 Mortgage Refinance" I refinanced my current mortgage to 3.12% search online for them if you are planning to do refinance.

Posted by: Anonymous | February 12, 2011 12:25 AM | Report abuse


Posted by: Anonymous | February 12, 2011 12:58 AM | Report abuse

This is such a joke. When will the real FRAUD be exposed?? Services are not real bankers. They are vultures patiently circling, waiting to pick over the remains of a rapidly weakening company or borrower. They are Market practitioners that salavate on the opportunity to be both the "B" piece owner and the "Special Servicer" and are often distressed debt specialist. They crafted "loan agreements" and "pool and servicing agreements" so complicated that your average borrower, ciruit court judge, and even traditional banker need armies of lawyers to help translate and comprehend. Forget about the SEC, FDIC, and other protective government agencies as they have yet to get up to speed on this amazing FRAUD and deception that is cripling our private sector and investors in these garbage credit facilities and loans. The commercial market is getting destroyed just like the residential markets but it seems that only the homeowners on the residential side seem to get the attention of the President and US Government. Businesses are being destroyed daily as these servicers refuse to make minor concessions on perfectly performing loans. I personally had a CMBS loan that matured and was a model borrower. I never missed a payment and never asked for my lender to make a concession. Unfortunately, when the collapse of the banking system was happening in 2009 and 2010, the special servicer was transferred my loan at maturity. They refused to give any extension at maturity for a month or a year. They said if i didn't find a new lender to pay them off, that they would forclose. I found a new lender and they still filed to foreclose and demanded way beyond the maturity balance on the loan. They demanded default interest post closing and fees that would make it impossible for anyone to be able to pay. There's a major disconnect from the bond holders who are the TRUE owners of the mortgage and the Master and Special Servicers. The interests are diverse and the incentive that the Special Servicer has is to delay, foreclose, and fee to death any project. Now get this, the servicer actually makes tons of money when it forecloses and sells that property for pennies on the dollar. They make significantly more money when they take the loan over in special servicing and foreclosure rather than work out resonable solutions with the exisiting borrower. This means that the special servicers are rewarded for screwing the bond holders (The actual Lender and Mortgage Holders) by selling for pennies on the dollar versus protecting the lenders / investors.

Again, a huge fraud is being commited and until Nightline ABC, FDIC, SEC, and other folks step up and expose this businesses and families will continue to get destroyed and our banking system with continue to deteriorate.

Posted by: Anonymous | February 12, 2011 1:18 AM | Report abuse

The flawed mortgage model was the repetition of the credit card model, only with collateral. Banks issued credit cards to millions without checking ability to pay. Preceding and during the last decade, mailboxes were stuffed with credit cards with gimmick terms. Mortgages were handed out the same way.

To fix the economy is to avoid debt and reduce consumption to what you need rather than what you want. In 10 years we could have a very strong economy.

Posted by: Beacon2 | February 12, 2011 5:38 AM | Report abuse

this person is a total liar, the Federal Reserve caused the housing crisis, no one else.

Posted by: Anonymous | February 12, 2011 9:01 AM | Report abuse

Yep and for all the people benefiting from low rates, savers and the prudent are being hosed by the Federal Reserve.

Bernanke didn't nationalize the banks, he nationalized depositors money in banks and Mmkt accounts. Without firing a shot he stole the value of these deposits and handed it to wall street, banks, debtors, deadbeats, speculators and the government.

Just remember if your house is paid off and you have savings, the value of your savings has financed your neighbors new 3.5% 15 year mortgage. This is the financial socialism of the Federal Reserve.

Argentina couldn't have done it any better. They will come after your retirement accounts next.

Posted by: wesatch | February 12, 2011 9:02 AM | Report abuse

Voters expect criminal indictments for the mess made out of our housing industry. The only people who have taken a financial hit are homeowners- both past and present. If government doesn't soon start criminally indicting those responsible then it's government itself that will be replaced. This issue isn't going to die down no matter how much those in charge wish it would.

Posted by: Desertdiva1 | February 12, 2011 10:34 AM | Report abuse

So the Feds delivered “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."
And, pray tell, who was president at the time of the debacle and which party is completely against regulating the crooks in Wall Street and the housing industry because the people’s loss is their gain$$?

Posted by: analyst72 | February 12, 2011 11:11 AM | Report abuse

Wow, this review (how much did it cost) found out:

"One of the major problems, she said, is that mortgage servicing operates on a "flawed business model that creates misaligned incentives.""

Stunning just stunning....the problem with managing delinquent loans is that the federal body is making the loans to those that will go delinquent and then has no one monitoring the process of loan payment....federal govt should get out of the loan business and into the regulation of the loan industry!

Posted by: mil1 | February 12, 2011 11:33 AM | Report abuse

Less government and fewer regulation that is the ticket to restoring the housing market.

Posted by: Anonymous | February 12, 2011 4:37 PM | Report abuse

The conclusions aren't a surprise.

The Federal Reserve's lack of action isn't much of a surprise either.

What has been a surprise is how ineffective Pres. Obama's administration has been on foreclosure relief.

Posted by: Anonymous | February 12, 2011 7:39 PM | Report abuse

I think everyone should watch free to choose, it was a TV series that Milton Freidman put out origonally in the 1980's. when will we learn that our freedom is being taken away! I do not need anyone to come up with any gimmick just stay out of my life, if you look at all governemnt programs they are all a big failure. Give back our country before it is to late. free enterprize created this country and oneday it will restore it if anyone lets the free market reign!

Posted by: Anonymous | February 14, 2011 11:21 AM | Report abuse

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