Federal Reserve Board Gov. Sarah Bloom Raskin believes the mortgage servicing industry needs to overhaul its practices and be more accountable, delivering the central bank's toughest words to date on the subject.
At a housing conference in Utah late last week, Bloom Raskin dismissed current servicing practices as a "broken system," and called on the industry to change how servicers are compensated, restructure pooling agreements and improve organizational accountability.
"For those in the housing and mortgage fields, making needed changes will not be easy," Bloom Raskin said, according to a copy of her prepared remarks. "In particular, for those in the mortgage servicing industry, it means difficult changes and significant investments to rectify broken systems. … Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish."
According to figures compiled by National Mortgage News and the Quarterly Data Report, the servicing industry has consolidated dramatically the past decade with five firms — Bank of America, Wells Fargo, Chase, CitiMortgage, and Residential Capital Corp. — controlling 64% of the nation's $9.8 trillion of housing receivables.
Bloom Raskin said regulators are due to release their review of servicing standards later this month, and what they have found is disturbing. "The preliminary results from this review indicate that widespread weakness exists in the servicing industry," Bloom Raskin said. "The agencies intend to report more specific findings to the public soon, but I can tell you that these deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets and diminish overall accountability to homeowners."
For the first time, Bloom Raskin elaborated on just what changes the Fed desires. First, she called on bank holding companies to be more accountable for the actions of their servicing units.
"For those servicers who are subsidiaries or affiliates of a broader parent financial institution, the responsibility for change and further investment absolutely extends up to that parent company, many of which have enjoyed substantial profits while their servicing arms have been run on the cheap," Bloom Raskin said.
She also called for strong corporate governance procedures for servicers that are monitored and enforced enterprisewide to prevent breakdowns.
"Servicers need sound policies and procedures that outline the rules, laws, standards and processes by which internal operations are assessed," Bloom Raskin said. "Senior executives need to emphasize compliance and qualitative measures over short-run cost efficiency, and need to articulate the presence of adequate quality controls and audit processes to identify risks and take timely, corrective actions where needed. Corporate leadership needs to communicate performance expectations that hold all business lines accountable to strong procedural controls."
