Fed's Raskin: Need reforms in mortgage practices (Reuters)

COLUMBIA, Maryland (Reuters) ? The U.S. economy is still suffering from a "shocking" drop in homeowners' equity and reforms are needed in how mortgage loans are originated and handled, Federal Reserve Governor Sarah Bloom Raskin said on Tuesday.

"To my dismay, here we are in 2011, with a recovery that is still being dragged down by serious housing problems that will require not just economic talent -- but significantly, legal talent -- to address," she told a Maryland State Bar Association group.

Raskin did not mention monetary policy specifically.

She said some $7 trillion has been wiped out in homeowners' equity since early 2006 as a result of falling house prices.

"This is a shocking and enormous decline," Raskin added.

She noted that there were well documented problems with mortgage servicing, including those turned up by federal banking regulators examining 14 federally regulated mortgage servicing companies.

Foreclosure operations were halted at large mortgage-servicing companies after discovery a year ago that servicers used so-called robo-signers to handle loan documents without verifying their contents. State laws were broken and many homeowners did not receive any clarity on whether or not they were eligible for federal loan modification programs.

"These problems indicate the existence of unsafe and unsound banking practices and violations of federal and state laws, as well as demonstrated patterns of misconduct and negligence on the part of servicers," Raskin said.

She suggested that, among other issues, the contracts underlying mortgage securitization contained "disincentives" for servicers to act in the best interests of investors and borrowers.

When defaults are low, the fees to servicers keep the interests of borrowers, servicers and investors in line, but the system is less effective when defaults are high, as they are now.

"Servicer compensation is not generally tied to the performance of the loan, and in most cases a servicer receives no extra payment for preventing a default," Raskin noted.

She said it was "imperative to reconsider the compensation structure so that servicers have adequate incentives to perform payment processing efficiently in performing mortgages and to perform effective loss mitigation on delinquent loans."

Raskin said the Obama administration should move forward with anti-foreclosure efforts that are under consideration, including finding ways to spur refinancing initiatives. She cautioned that as the administration steps up efforts to keep borrowers in their homes, moral hazard issues linger, especially if directives on housing policy include reductions in loan principal.

(Reporting by Glenn Somerville and Margaret Chadbourn; Editing by Padraic Cassidy)

Source: http://us.rd.yahoo.com/dailynews/rss/economy/*http%3A//news.yahoo.com/s/nm/20111004/bs_nm/us_usa_fed_raskin

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