Federal Reserve Governor Sarah Bloom Raskin says the biggest drag on the nation's economy is the absence of any substantial recovery in the housing sector.
[IMAGE]In a speech at the Midwinter Housing Finance Conference in Park, City, Utah, Raskin challenged the mortgage servicing industry to step up to the plate and make home retention the top priority and restore communities that have been damaged by the housing collapse.
Citing data from the Census Bureau, she pointed out that homeownership rates have fallen so significantly in recent years that they have more than wiped out the increase in homeownership that had taken place between 2000 and 2007.
""When I think about this statistic, I see not only the drag on the nation's already-tepid recovery, but the millions of American families who have lost their homes and their hopes,"" Raskin said. ""When people lose their homes, the impact is felt not only by the homeowners, but by the broader community: the bonds of community are weakened, business investment is undermined, homelessness increases, children are uprooted, unemployment deepens, and even health problems multiply.""
So what needs to happen to put the housing and economic recovery on track? Raskin says to begin with, mortgage servicers must start at the ground level and work with troubled borrowers to prevent additional foreclosures that will further weaken the market. She stressed that it is critical for servicers to review all options for all delinquent loans before deciding that foreclosure is the best course of action.
Foreclosure cannot be avoided in every case, Raskin acknowledged. But she said servicers must consider all reasonable alternatives, ranging from government programs and proprietary mods to short sales and deeds-in-lieu-of-foreclosure, _before_ filing for foreclosure.
""Servicing shops need to be diligent in pursuing these options, and investors need to be supportive of efforts to find net-positive alternatives to foreclosure,"" Raskin told attendees at the conference.
[COLUMN_BREAK]She stressed that such action will have a far-reaching positive impact by resulting in a lower inventory of distressed properties, which will lead to higher property prices and a healthier pace of recovery.
""For those in the housing and mortgage fields, making needed changes will not be easy,"" Raskin said.
""For those in the mortgage servicing industry, it means difficult changes and significant investments to rectify broken systems,"" she said. ""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.""
Raskin argued that fundamental changes must be made to servicing practices. She said that starts with strong corporate governance that clearly communicates performance expectations and holds all business lines accountable to stringent procedural controls.
""[S]omething is wrong,"" Raskin said. ""Here we are in 2011, looking at high levels of foreclosures on the horizon, looking at significant failures in process, and nothing much has changed"" in more than four years of crisis.
One change that the industry must consider, according to Raskin, is a new pricing model that better compensates servicers for the handling of nonperforming loans and provides them with incentives to keep borrowers in their homes.
Raskin says another structural change that would help would be a limit on the extent to which servicers have to advance principal and interest on non-performing loans. She notes that in times of high delinquency, this can put considerable financial strain on servicers, which can lead to negative consequences for consumers.
Raskin says secondary market pooling and servicing agreements should be amended so that servicers only have to advance mortgage principal and interest up to 60 or 90 days beyond delinquency. Alternatively, they could advance principal and interest payments only as they come in.
""Either change would affect the payment streams to investors, but I would imagine that participants in the secondary markets would be able to model with some confidence how this would affect the value of securities and adjust pricing accordingly,"" Raskin said.
""Too many of the practices in the mortgage servicing industry have been developed and defended solely on the basis of ‘standard industry practice' but many practices were not only standard but shoddy,"" Raskin said. She says it's time to ""rebuild an important but currently dysfunctional sector of the housing market.""