Foreclosure-gate has highlighted long-standing flaws in the servicing process, but “larger problems” with the mortgage servicing business will require “serious” reforms, according to Federal Reserve Board governor Sarah Bloom Raskin.
The new Fed governor and former Maryland financial services regulator noted that the servicing industry is plagued by misaligned incentives that discourage loan modifications along with a history of bad business practices and shoddy operating procedures.
The way servicers are paid left them unprepared to deal with the foreclosure crisis, Raskin said at a National Consumer Law Center conference on Friday.
“Unfortunately, there is plenty of evidence to suggest that many servicers’ workforces lack the knowledge and capacity to deal with the immensity of the mortgage crisis,” she said.
The Fed governor expressed hope that the efforts of the 50 state attorneys general to fix the robo-signing problems will also lead to structural reforms in the servicing process.
“Until a better [mortgage servicing] business model is developed that eliminates the business incentives that can potentially harm consumers, there will be a need for close scrutiny of these issues and for appropriate enforcement action that addresses them,” Raskin said.
The Mortgage Bankers Associations also believes it is time for changes to the servicing business model.
At an REO property preservation conference on Monday, MBA senior vice president Steve O'Connor noted the Fed governor's remarks.
The foreclosure crisis presents an "opportunity to take stock of lessons learned and figure out we can do it better," he said.
"At MBA, we welcome that challenge," O'Connor said.
Separately, Fed governor Daniel Tarullo noted that too many homeowners face delays and disappointment in trying to get a loan modification while others have stopped paying and continue to live rent free for a year or more. “This is simply not a good outcome,” Tarullo said at a George Washington University law school conference on Friday afternoon.
Whatever the explanation for this situation, he said, “It just cannot be the case that foreclosure is preferable to modification – including reductions of principal – for a significant proportion of mortgages where the deadweight costs of foreclosure, including a distressed sale discount – are so high.”
