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‘Shoddy’ mortage servicing practices prolonging housing market trouble

This past Friday Federal Reserve Board Governor Sarah Bloom Raskin spoke at the 2011 Midwinter Housing Finance Conference about the powerful impact the housing and mortgage markets have had on the nation’s economy recovery.

Governor Raskin began by point out that, “speaking strictly in an economic sense, the recession that emerged in 2008 is over.”  She then followed by saying “I know that the millions of Americans still looking for work, living in cars or motels, or trying to keep their businesses out of bankruptcy would beg to disagree.”  Gov Raskin went on to state that our economy is in fact growing, but the pace of recovery is “agonizingly slow” and not keeping pace with recovery in prior recessions.The housing market normally leads the way to recovery…

In discussing reasons for why the recovery from this recession is so slow, Gov. Raskin pointed out that normally housing is the first sector to recover after a recession and this is usually followed by a “robust” increase in consumer expenditures and durable goods but this time housing is being weighted down by “the enormous losses in income and net worth that households suffered in the recession. In addition, the persistent high rate of unemployment is further depressing housing demand, creating uncertainty about housing prices, and impeding that robust recovery in the housing sector that we generally see. With a pipeline full of distressed properties, the unfortunate consensus is that we should expect even more downward pressure on house prices. Potential buyers seem inclined to wait and see if they can get a better buy in the future. Builders, too, are deterred by the additional competition lurking in this reservoir of vacant and distressed properties.”

Foreclosures and distressed sales hamper recovery and hurt communities…

Gov Raskin pointed out that, according to the Census Bureau, homeownership rates have fallen in recent years so significantly that it has more than wiped out the increase in homeownership that took place between 2000 and 2007.  The sad fact is the primary reason for this decline in homeownership is that millions of American families have lost their homes due to foreclosure.

“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”, said Raskin.

So who’s to blame?

I have to admit, this is the point where I think if I was one of the many people in the mortgage industry attending this conference I might start squirming in my seat as Gov Raskin began to “spank” the industry.  In order to lead the housing market (and ultimately the economy) to a recovery, Gov Raskin said “we should start at the ground level and work with troubled borrowers to prevent additional foreclosures that will further weaken the market. We need to make certain that foreclosures take place only when there is no option available that would be preferable to both the borrower and the investor.”

Gov Raskin then referred back to a November speech in which she spoke about the problems in residential mortgage servicing operations that were “undermining the performance of this industry” and said “these problems existed before November and as far as I can tell they remain unaddressed.”  She went on to say that these deficiencies “pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners.”  In what may seem to be somewhat of a sarcastic statement, but I think shows her frustration with the industry, Gov Raskin said “I’m sure this has been said, but I’ll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007: Until these operational problems are addressed once and for all, the foreclosure crisis will continue and the housing sector will languish.”  (Ouch!)

Foreclosures in 2007 pointed to a virtual tsunami…foreclosures hinder our recovery…

In her speech Governor Raskins spoke how we are now looking at high levels of foreclosures on the horizon, significant failures in process, and nothing much has changed since 2007.  “I always thought this dysfunction was going on for too long–but I’m someone who thought the successive waves of foreclosures in 2007 amounted to a virtual tsunami. In my mind, massive foreclosures were always a sign of an equally massive market failure. Well, now it seems to me we have reached a point where this sign of failure is hindering our economy’s ability to rebound,” said Raskin.

Finally, speaking about the many practices of the mortgage servicing industry that she finds flawed, contributing to the housing market collapse and are hindering the recovery of the market, Gov 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.

Time to “pay back the American citizenry“….

This is probably my favorite part of the speech, when Governor Raskin tells the mortgage industry “it is time to pay back the American citizenry in full, and not just in the literal sense, but in the sense that there must be reciprocity and mutuality in our structuring of economic policy so that we do not travel this low road again.”  She then addressed the subsidy and aid that has been given directly, or indirectly, to financial institutions and told them “they  must go beyond the corrective actions that need to be taken to rectify current deficiencies. It means that financial institutions need to understand the effects their actions will have on consumers and the country as a whole, and factor those considerations in to their business decisions. ”

The economy has started to rebound….

Ending her speech on somewhat of a positive note, Raskin told the crowd that our economy has started to rebound, but “we need a strong housing market in order to ensure a complete, stable, and sustainable recovery.”  She then reminded the industry that they have a role to play in this “mission” and she urged them to “embrace this challenge” and to do their part to contribute to the economic rebuilding of our country.

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